Monetary Accommodation

Monetary accommodation continues is the key takeaway from Fed Chairman Jay Powell’s press conference March 17. 

Monetary accommodation is where the Fed maintains low base rates and keeps the treasury yield curve suppressed

Thereby reducing the cost of credit, financing debt. The Fed is also keeping the liquidity tap open by purchasing more than $120 billion-per-month in asset purchases, which is known as quantitative easing QE.

The Fed’s policy of continuing monetary accommodation or monetary easing is a tailwind for growth companies, where their fuel for expansion is credit, the availability of inexpensive finance

Monetary Accommodation

Put another way available cheap finance makes it easier for companies to make investments (CAPEX), employ the factors of production, and win market share. In other words, the Fed’s Monetary accommodation policy will continue to support innovative fourth industrial revolution companies.

Darren Winters believes that capital flow rotations out of growth could have been halted due to the Fed’s ongoing monetary accommodation

Despite inflation fears, which some investors argued would lead to higher interest rates. 

The Fed’s commitment to monetary accommodation is explicit, the central bank will remain dovish and accommodating until data indicators an economy firing on all cylinders

So, the transition from a policy of accommodation to normalization will occur if and when the economy hums along and liquidity becomes less of a factor keeping the economy from a meltdown. In other words, the Fed’s reduction in $120 billion-per-month QE is likely to be gradual and uneventful. 

The Fed has said it wants to make “substantial further progress” on its twin goals of maximum employment and stable 2% inflation.

Fed chair Powell referred to the 465,000 jobs created in the private sector in February as “a nice pick-up,” then added, “you can go so much higher, though.” “To achieve substantial progress from where we are is going to take some time — I don’t want to put a pin in the calendar someplace because it’s going to take some time,” he said.

The Fed’s monetary accommodation is also targeting higher employment

But what about inflation?

Fed chair Powell then calmed inflation fears. Powell admitted that the economy could see a temporary blip in inflation in services as the virus wanes and people go out to dine, travel, and book hotels. We are likely to see pent-up demand in the service-sector but Powell argued that this will be a one-time bulge on prices that won’t change inflation going forward. Service-sector inflation is driven by demand-pull whereas goods inflation is driven by cost-push factors. 

“You can only go out to dinner once per night” said Fed chair Powell. So, service sector demand in the post-pandemic economy is anticipated to normalize swiftly. 

The less talked about Fed’s SLR (supplementary leverage ratio) decision would show the Fed’s hand, regarding its monetary accommodation policy

Under the financial market’s bonnet, the SLR requires banks to maintain a minimum level of capital against assets without factoring in risks. But to keep liquidity tap open during the pandemic the Fed temporarily suspended SLR requires. 

The Fed has yet to make its decision on whether to reinstate SLR requirements. If the big banks had to comply with SLR that would reduce the demand for treasuries, which could send yields spiraling.  

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