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Jay Powell’s problem

By Michael Knox - posted Tuesday, 12 February 2019

A lot of work has been done on the relationship between corporate spreads and US growth, especially by the New York Fed.

Jay Powell's problem is that he wants to avoid the next US recession. He wants the US economy to slow to the level of around 1.8% to stabilise unemployment and inflation but avoid a major economic slowdown.

The Fed meeting

Following the Fed meeting of 30 January, Jay Powell affirmed that the Fed would pause movements in the Fed funds rate while it was "patiently awaiting greater clarity". He said he would adopt a "patient wait and see approach".

As well as pausing the Fed funds rate movements for an indefinite period, Powell also said the Fed would undertake a review of "balance sheet normalization". He remarked that the "current estimate of reserve demand is higher" and hinted that the Fed might end its program of balance sheetnormalisationearlier than expected. He said "we will be finalising these plans at future meetings".

Conclusion

Jay Powell says there is currently no sign of a US recession. His action in pausing the Fed funds rate plus an early end to reducing the Fed balance sheet tells us that he wants to assure that no sign of a US recession occurs any time soon.

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This article was first distributed by Morgans.

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