Taps Coogan – September 17th, 2020

Enjoy The Sounding Line? Click here to subscribe.

In prepared remarks following yesterday’s FOMC statement, Fed Chairman Jerome Powell explicitly and unambiguously laid out the path for Fed policy in the coming years. Here it is:

Jerome Powell:

“We will aim to achieve inflation moderately above 2% for some time so that inflation averages 2% overtime and long term inflation expectations remain well anchored at 2%. We expect to maintain an accomodative stance of monetary policy until these outcomes, including maximum employment, are achieved… We now indicate that we expect it will be appropriate to maintain the current 0% to 0.25% target range for the Federal Funds range until labor market conditions have reached levels consistent with the committees assessment of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time. In addition, over the coming months we will continue to increase our holdings of Treasury securities and MBS at least at the current pace…”

In remarks he made earlier in the month, Chairman Powell said that the ‘some time’ language that appears above would be measured in years.

All-in-all, the Fed has now repeatedly and explicitly stated that they intend to keep benchmark interest rates at zero for ‘years’ and until the labor market fully recovers and inflation is on pace to overshoot 2% for some considerable amount of time. They also intend to ‘print’ as much money as is need in order to keep interest rates pegged to zero in such an inflationary environment (at least the current pace of $1 to $2 trillion a year). 

In other words, the Fed is committed to doing everything it can to guarantee negative real interest rates for bond holders for years to come and they won’t reconsider that if inflation surpasses 2%.

For what it’s worth, I don’t think that the Federal Reserve has ever been more explicit in its intended policy path.

As we noted yesterday, if you have been wondering who the bag-holder will be for the prior decades’ fiscal and monetary excesses, the Fed is telling you point blank: bond holders. Unfortunately for you, among the largest bond and treasury debt holders in the world are Social Security, Medicare, various government pension funds, and sovereign wealth funds. In other words, you the taxpayer.

Would you like to be notified when we publish a new article on The Sounding Line? Click here to subscribe for free.