The Fed’s Blindspot

I don’t say this often, but Fed Chairman Jerome Powell is wrong. Regular readers of our investor letters and other publications will recall that we regularly cite Chairman Powell as doing the best he can with the levers he has while arguing correctly for others to do their part. In particular, he has strongly argued on many occasions that monetary policy isn’t sufficient to mitigate the impacts of the pandemic and that long-term solutions require fiscal (i.e. legislative) policies. Without explicitly calling out a Congress that has heretofore been unwilling to act boldly, he made clear publicly that inaction in the Capitol will hinder any permanent recovery. But then, he said this at his press conference on January 27 after the FOMC meeting that same day at which the Fed left interest rates near zero as expected:

So I would just say that our — there are many things that go in as you know to setting asset prices. If you look at what’s really been driving asset prices in the last couple of months, it isn’t monetary policy. It’s expectations about vaccines and also fiscal policy. Those are the news items that have been driving asset purchases — sorry, asset values in recent months. So I know monetary policy does play a role there, but that’s how we look at it and I think, you know, I think the connection between low interest rates and asset values is probably something not as tight as people think because a lot of different factors are driving asset prices at any given time. [emphasis added]

He is right that asset prices are the result of many factors above and beyond monetary policy. (And he once again made the case for fiscal policy action at the same press conference. We very much appreciate his consistency.) This isn’t the first time he has addressed asset prices and interest rates. In his December 16 press conference, in addition to again making the case for fiscal policy (several times, in fact), he said this:

Admittedly, PEs [price-to-earnings ratios] are high, but that’s maybe not as relevant in a world where we think the 10 year treasury is going to be lower than it’s been historically from a return perspective…. Non-financial corporate leverage is high. We’ve been watching that, but rates are really low. And so companies have been able to handle their debt loads even in weak periods because rates are quite low. Your interest payments are low.