Bank of America’s economists pull together some insights from Fed Chair Powell’s appearance on 60 Minutes this weekend. I thought this was the most interesting insight:
Most Fed officials in recent years have endorsed an “asymmetric risk management” approach to potential asset “bubbles”: if bubbles are hard to identify and manage then allow them play out, but intervene aggressively if the popping of the bubble threatens the economy. Powell reinforced that message “We don’t have the ability to identify asset bubbles perfectly. So what we focus on is having a strong financial system that is resilient to shocks.” This takes off the table any Fed response to booming asset markets.
Josh here – okay, so no more talk of taking away the punch bowl. Instead, let’s make sure the most drunken guests aren’t able to destroy the rest of the party.
BofA economist Ethan Harris counters with this:
As we have noted before there are some important gaps in the Fed’s current strategy. First, while the Fed does not want to take sides on the stimulus debate, the outcome should have a huge impact on its economic forecasts. Doesn’t the steady increase in the amount of stimulus change the appropriate policy path? Second, it is one thing to forgo forecasting when you are far from hitting your goals; however, as inflation overshoots the target and gathers momentum the Fed will need to start forecasting if it is to avoid a serious overshoot. Third, the Fed’s approach to asset bubbles leaves two unanswered questions: (1) why can’t the Fed use targeted tools when it sees a high probability of a bubble, and (2) what should it do if its policy framework encourages bubbles?
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Six takeaways from 60 Minutes Bank of America – April 13th, 2021