Despite the Fed’s stated pivot toward removing COVID stimulus measures, its policy is still very accommodative compared to those of the past. Colby Smith and Eric Platt report for the Financial Times:
US financial conditions are near the most accommodative on record, even as the Federal Reserve has begun stepping up its exit from coronavirus crisis-era stimulus measures in a bid to battle elevated inflation.
Measures of financial conditions have only marginally tightened since last week’s Fed meeting, according to economists at Goldman Sachs, who produce a closely followed index that takes into account the shifts in the US stock market, borrowing costs for companies, moves in the dollar and funding costs for the US government.
Despite the hawkish pivot, US stocks have stayed buoyant around record-high levels, while yields on US Treasuries remain stubbornly low compared with their historic norms.
The fact that companies have had little trouble listing shares publicly, or tapping lenders for new credit, underscores the extraordinary levels of cash sloshing through the global financial system and presents a puzzle for Fed policymakers seeking to cool down the economy and tame inflation.
“The objective is to slow things down and hope that inflation does move lower,” said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives. “To do that you need financial conditions to be a little bit tighter.”
The Fed is highly sensitive to financial conditions, given that it offers a gauge of how shifts in central bank policy and global economic outlooks are filtering out into the real world. Jay Powell, its chair, acknowledged as much last week. He stressed that the economy no longer required such enormous emergency aid, but despite the central bank’s new plans to more quickly reduce its asset purchase programme, financial conditions would still remain “accommodative”.
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