eco TV Week

Fed’s Powell brings reassurance

9/3/2021

Fed Chair Powell’s speech at the annual symposium at Jackson Hole organised by the Federal Reserve of Kansas City was eagerly awaited by financial markets, which were hoping that he would shed some light on the Fed’s intentions of scaling back its asset purchases.

William DE VIJLDER

TRANSCRIPT // Fed’s Powell brings reassurance : September 2021

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In response to the Covid-19 pandemic, the US Congress set up the Paycheck Protection Program (PPP) in April 2020 to provide loans backed by the Federal government to small and medium-sized enterprises (SME). When subscriptions closed on 31 May 2021, about USD 800 bn in PPP loans had been issued. Banks originated 80% of these loans and non-banking lending companies and fintechs issued the remaining 20%. Several aspects of this programme differ from France’s state-backed loan programme (PGE), especially its fiscal cost. First, in the United States, the Federal government fully covers the credit risk associated with government-guaranteed loans1. Second, American lenders receive fees to compensate for the cost of originating PPP loans (between 1% and 5% depending on the principal amount). Based on the structure of PPP loans outstanding, the amount of fees paid was about USD 30 bn. Lastly, in the US, under certain conditions, the government-guaranteed loans can be converted into public subsidies to the corporate borrowers (limited to the amount of payroll costs, as well as utilities, mortgage and rent payments). For PPP loans to be partially or fully forgiven, the corporate beneficiary had to maintain jobs and wages during the 8 to 24 weeks after the loan was granted. At 10 October 2021, more than USD 575 bn in PPP loans outstanding had been forgiven (7.5 million loans), or 73% of the total amount outstanding (65% of the total number of loans granted)2. Under the extreme hypothesis that all of the PPP loans distributed under the programme were fully forgiven, the fiscal cost of the mechanism would amount to USD 835 bn3. 1 In France, the government assumes 70% to 80% of the credit risk for PGE to major corporations, and 90% for PGE to small and medium-sized enterprises. French banks cover the residual risk. 2 PPP forgiveness platform lender submission metrics reports (sba.gov) 3 Covid Money Tracker
Damaging tardiness 10/11/2021
One of the shocking paradoxes of America, cradle of the miracle of vaccines against Covid-19, is that the country is still seeing daily death numbers in the thousands. The still-too-deadly wave of the epidemic over the summer may have contributed to the slowing of the recovery in employment.
Budget battles and monetary tightening 10/6/2021
On the whole, the US economy has recovered very quickly, albeit unequally, from the loss of business caused by the Covid-19 pandemic. Exceptional Federal transfers have fuelled a spectacular rebound in private consumption, so much so that it is nearly overheating. Faced with a global parts shortage and hiring troubles, companies are having a hard time meeting demand. Prices have come under pressure. For the US Federal Reserve, the time has come to begin withdrawing monetary support. The debt ceiling has just been hit, and major budget bills remain in suspense until an agreement to raise the limit can be reached with the Republicans.
Employment situation improves, but the Delta variant is creating doubt 9/6/2021
In his traditional monetary-policy speech to the annual Jackson Hole Economic Symposium, Federal Reserve Chairman Jerome Powell expressed satisfaction with the latest US jobs market figures. He had good reason to do so: in the three months from June to August, the US economy created more than 2.2 million jobs (non-farm activities), including almost 800.000 in the resurgent tourism industry (hotels, restaurants, leisure etc.). Although the Covid-19 jobs deficit remains large (around 5.5 million) and although the unemployment rate is still too high by American standards (5.2%), the situation is gradually returning to normal.
United States: a new tool to reduce the pressure on money-market rates 9/1/2021
On 28 July, the US Federal Reserve (Fed) announced that it would establish a Standing Repo Facility (SRF). Each eligible counterparty* will now be able to borrow, every business day and on an overnight basis, up to USD 120 billion of central-bank liquidity as part of the SRF**. Operations will bear interest at the marginal lending facility rate (25bp) and be capped at USD 500 billion. The SRF gives the Fed a new tool for detecting possible central-bank money shortages. In September 2019, the system was introduced on an emergency basis and temporarily, and helped to ease the repo markets crisis. However, no such system existed ahead of the shock, when regulatory liquidity constraints, made worse by the reduction in the Fed’s balance sheet, prevented banks from responding to the demand for cash in the money markets. The possibility of converting securities into reserves at any time, without the stigma associated with the discount window, is of limited use in the current context of abundant liquidity but could prompt certain banks to increase their portfolios of Treasuries and Agencies. This could be the case for small banks that, unlike their very large peers, currently hold less securities than they could use considering their SRF limit. * Primary dealers and, from 1 October 2021, depository institutions with total assets of more than USD 30 billion or with a securities portfolio of over USD 5 billion at 30 June 2021. According to S&P Global Market Intelligence figures, 69 depository institutions could access the facility. ** Through sales of Treasuries, debt securities and MBSs issued by mortgage guarantee agencies to the Fed on a repo basis.
US inflation: increasing discomfort 7/26/2021
Annual inflation has reached 5.3% in the US in June. Its drivers are still very concentrated but there is concern that they will spread. Anecdotal evidence is accumulating that price pressures faced by companies are increasing. Price pressures as reported in the ISM survey send the same signal. Historically, they have been highly correlated with producer price inflation and consumer price inflation but the transmission depends on factors such as pricing power, competitive position, labour market bottlenecks, etc. The next several months will be crucial for the Federal Reserve and for financial markets, considering the Fed’s conviction that the inflation increase should be temporary. The bond market has bought into this view thus far but, going forward, its sensitivity to upside surprises to inflation should be higher than normal.
US Treasuries: buyer beware 7/19/2021
The significant decline of Treasury yields from their peak at the end of March is puzzling given the growth forecasts and the recent inflation data. This suggests that investors side with the Fed in thinking that inflation will decline. It also reflects the weakening of data in recent weeks, which implies that markets focus more on the change in the growth rate than on its level. The sensitivity of bond yields to economic data moves in cycles. One should expect that, as seen in the past, a less accommodative US monetary policy would increase this sensitivity because these data will shape expectations of more tightening or not. Before reaching that stage, we should already expect an increased sensitivity in the course of 2022, because it is quite likely that inflation will remain above the FOMC’s target.
The timid return of the pandemic’s vanishing labour force 7/15/2021
With the onset of the Covid-19 pandemic, the labour force participation rate – the percentage of the population who are working or seeking employment – dropped to an all-time low in April 2020: barely 74% of the 20-64 age group, which is unprecedented for the United States. Although it has picked up in recent months, it still has not returned to pre-crisis levels. Nearly 3 million Americans who were active in the labour force prior to the pandemic have disappeared from the ranks. The workers who have “fallen off the radar” are mainly from low-skilled, low-paid social categories. According to the Bureau of Labor Statistics, people with a high school education or less make up only 30% of the active population, but account for 75% of the post-Covid collapse. Certain categories of workers (extras earning tips, seasonal workers, etc.) who were unable to work during the crisis have had more trouble than others justifying revenues that make them eligible for unemployment benefits. With the closing of schools and day care centres, many single mothers with children have had no choice but to halt or postpone their job searches. Exclusion from the labour market may also have been accentuated by the digital divide and trouble accessing the internet. Yet things should gradually return to normal with the very strong upturn in hiring in sectors such as hotel & restaurant services, leisure and transport. For the Federal Reserve, which has made full employment a priority of its monetary policy, the rebound in the participation rate will be a key factor. 
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After the catharsis of this spring, which saw the rollout of the Covid-19 vaccine alongside that of the billions provided by the Biden plan, the business climate in the US has calmed somewhat. In June, the Institute for Supply Management (ISM) purchasing managers index was at 60.6 in the manufacturing sector, which though high in absolute terms (the long-term average is around 53) is nevertheless down as compared to previous months, and particularly the record month of March. The same modest correction was seen in services. 
Is inflation back? 7/7/2021
With GDP growth of nearly 7% this year, the US economy is in the midst of a spectacular but uneven recovery, erasing the losses generated by the pandemic, but also leaving numerous workers behind. Fuelled by rising commodity prices and surging consumption, inflation has reached a peak of 5%, the highest since 2008. Esteeming that this flare up will be short lived, the Federal Reserve (Fed) is being tolerant and will forego a preventative tightening of monetary policy. Its top priority is to see the recovery spread to all sectors of the economy and to restore full employment in the labour market.

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