One of the most important news in the financial world last week was the Reddit shortage of open positions in GameStop (NYSE 🙂 stocks. Some names in the mainstream financial media thought this had changed the world permanently. A black swan showed its ugly face and the apocalypse was looming.
Maybe. But the FED President was remarkably calm at the news conference Wednesday, when the momentum was building.
Financial Weaknesses Are Generally Average
In response to a question about easy money and fueling asset bubbles like GameStop, Powell said he wanted to offer a “context”, saying “weaknesses in financial stability are generally average.”
The context is that we are in the midst of a global epidemic that has caused millions of job losses and a sharp drop in production in the US. Like the 2008 financial crisis, the FED poured trillions of dollars into the economy to fill the huge vacuum left by these shocks.
According to Powell, the factor behind some of the asset bubbles was mostly the COVID-19 vaccination process and the prospect of financial incentives. The FED looks not only at asset values, but also at bank leverage, non-financial leverage, and funding risk. Powell:
“Our overall goal is to ensure that the financial system itself is strong and resistant to all kinds of shocks.”
“I think the relationship between low interest rates and asset values is not as tight as people think, because there are many different factors driving asset prices in each period.”
Nobody would want a large number of hedge funds to fall prey to a gang of young investors and go bankrupt, but for the few funds caught in a short position stuck, most of us probably thought they deserved what happened to them. Maybe they’ll be more careful next time.
Stock markets fell on a weekly basis, but analysts attribute the drop to some of Wall Street’s concerns that hedge funds are pulling out of their positions at large companies to close their open positions and Robinhood and some brokers are causing a boom like Lehman Brothers.
The Sluggish Vaccination Process and the Virus are a Greater Worry
After the two-day Federal Open Market Committee (FOMC) meeting held last week, FED members were more concerned about the slowness of the vaccination process and the impact of the virus on the economy.
“The pace of recovery in economic activity has slowed in recent months and weakness has concentrated in the sectors worst affected by the epidemic,” the FOMC said in its December statement that the situation has worsened.
For Powell, this means that both asset bubbles and inflation are less important issues than people getting back to their jobs and getting their lives back on track.
“Obviously we would welcome slightly higher inflation,” Powell said at the press conference.
“The kind of troubled inflation that our peers witnessed growing up is unlikely in the local and global context we have been in for some time.”
San Francisco Fed President Mary Daly echoed these concerns and said it would be a mistake to withdraw the central bank’s monetary support for the economy too soon, just because some people are making money in the stock market.
“We are building a bridge that many communities can hold on to, and the stock market is doing very well, and people who already have money make more money,” Daly Stanford said at a virtual organization organized by the Grafuate School of Business.
“I just don’t want to damage people’s lives by breaking this bridge so that those who have already made money from the stock market don’t earn more, because these people are unemployed, they don’t have an income or income growth.”
As of this first meeting of 2021, Daly has become the voting authority in the FOMC. Predictably, the five new voting members set a common stance, with no dissenting opinion from the 11 voting members.
Former FED President Janet Yellen has been acknowledged as Treasury Secretary as expected, and everyone now expects a new era of FED-Treasury cooperation as Powell and Yellen have worked in mutual offices in the past.
At the same time, Powell’s term will expire within a year, and Yellen will undoubtedly provide his opinion to President Joseph Biden on the reassignment of Powell.