Federal Reserve Chairman Jerome Powell and crew deliberated at the July Federal Open Market Committee (FOMC) Wednesday and, as expected, everything was kept as is, including rates unchanged. However, all eyes were on the commentary to gauge the mood and sentiment of the Fed after all its efforts since March with markets now back close to year-to-date highs.
Powell reiterated that the Fed will keep rates very low until it is confident that the economy is well underway. His famous phrase: "We are not even thinking about thinking about raising rates."
We can be certain that even if the economy does improve, the Fed will think twice about raising rates unless it cares to wobble the markets as it did back in the fourth quarter of 2018. It reiterated its commitment to do what it takes to provide support and to have other tools in its kit without specifying what exactly they are. The dollar had a knee-jerk reaction lower, taking markets and gold higher. But there was more to the commentary.
One of Powell's more interesting comments was how he thought that "for quite some time we're going to be struggling with disinflationary pressures, not inflation." This is at odds with what the market has been pricing in recently.
Take a look at five-year breakeven inflation swaps trending higher, causing real yields to move lower and squeezing gold and silver higher in recent days. It seems the Fed is not worried about inflation, interestingly.
In addition, it acknowledged that the high-frequency data showed the recovery had slowed in June with the spike in new virus cases. Powell appeared to have a more somber view of the economy than its traders.
In all honesty, the Fed really does not know. It is just wishing that what it has done is enough and the economy magically can grow, that companies can come out from bankruptcies and hire 14 million Americans; in other words, life back to ho-hum. The Fed can print money, but it cannot print jobs nor force companies to spend and hire, especially when they have so much of their old debt to pay down first.
It is true the Fed did a remarkable job in stemming the decline in asset markets back in March and plugged a hole in repo and offshore dollar swap markets before the problem got worse. But now that the taps are open, these facilities are not even being used as extra money cannot solve their problems.
The Fed is concerned about a potential dollar shortage and wants to make sure it is available, should it be needed. The systemic problems of the economy are not resolved. They just got pushed underneath the carpet for now, but they always can come back to bite. It almost felt like the Fed had its hands tied and has done whatever it can do as it reiterated that it now is in the hands of fiscal policy, not monetary policy.
Job growth and the economy need fiscal stimulus to really get going. So far, the Republicans and Democrats are unable to agree on a bill as there is no consensus. As of now the eviction moratorium is expiring and unemployment benefits of $600 a week have passed. The $1 trillion number may not be enough in light of the weakness in the underlying economy and its growth problems.
The Fed did a great job in boosting the asset markets with its aggressive monetary stimulus. For the market to move even higher we need to see real economic growth -- in other words, real productivity, not just a recovery in asset prices.
With 14 million Americans out of jobs and even Powell saying he expects labor market recovery to take a long time, I'm not sure how the U.S. will grow itself out of this recession. It is certainly not V-shaped.
One thing is for sure: The Fed's hands are tied as it cannot justify increasing its balance sheet of $7 trillion given where markets are. Unless, of course, the market was to fall precipitously after failing to stand on its own two feet; then the Fed could step in or at least justify stepping in.