Did The Fed Just Send A Message?

In case you missed it, last Friday, the Federal Reserve agreed to let a year-long suspension of capital requirements for big banks that allowed them to exclude Treasury securities and deposits held at the Fed from their supplementary leverage ratio expire at the end of the month.

While the subject of bank capital ratios usually puts some people to sleep, the Fed decision could have very real consequences for the financial markets and the nascent economic rebound at large. It also seems to diverge from the Fed’s own stated and oft-repeated monetary policies.

Then again, the Fed may have just sent a subtle message that its low-rate stance is about to change.

As the New York Times explained, the intention of relaxing the banks’ capital requirements last year at the outset of the pandemic-induced economic lockdown “was to make it easier for financial institutions to absorb government bonds and reserves and still continue lending. Otherwise, banks might have stopped such activities to avoid increasing their assets and hitting the leverage cap, which would mean raising capital. But it also lowered bank capital requirements, which drew criticism.”

At a practical level, Friday’s decision may add further fuel to the fire that is driving up bond yields by discouraging banks from buying Treasury securities, which would seem to run counter to the Fed’s low-interest-rate policy. The Fed, of course, is buying trillions of dollars of Treasury and mortgage-backed securities, which it has stated it has no intention of stopping. Yet, it saw fit to make a move that could have the effect of driving the banks – also big buyers of government securities – out of the market. So why did the Fed do this? Continue reading "Did The Fed Just Send A Message?"

The Conundrum Continues

Just how bad are things for the U.S. economy anyway? If you just finished reading the financial news headlines the past few days, you can't be blamed for being just a little confused.

From the government side, you would swear that the sky is falling. Not only is the COVID-19-fueled financial crisis ongoing, but it might also be getting even worse. Last week, we heard it from Federal Reserve Chair Jerome Powell and this week from his predecessor, Janet Yellen, President Biden's nominee for Treasury Secretary.

"The economy is far from our goals" of full employment and sustained 2% inflation, Powell said at a webcast sponsored by Princeton University. Therefore, he said, "Now is not the time to be talking about exit" from easy money policies. "When the time comes to raise interest rates, we will certainly do that," he said. "And that time, by the way, is no time soon."

Yellen painted an even bleaker picture. "Economists don't always agree, but I think there is a consensus now: Without further action, we risk a longer, more painful recession now—and long-term scarring of the economy later," she said in prepared remarks for her confirmation hearing before the Senate Finance Committee.

While not dismissing the concern that "further action" would add to the already humungous federal debt burden – now at $21.6 trillion and expected to grow even more under Biden – Yellen was more worried about the possible consequences of not spending enough. Continue reading "The Conundrum Continues"