What’s going on?

• Jerome Powell believes that the US economy is still quite far from its targets of 2%-inflation and full employment. This is the core basis for the FED to continue to maintain the current easy-money policies. 

Easy money occurs when FED wants to stimulate the economy and lower the unemployment rate. In general, the central bank would make money flow between banks more easily, allowing interest rates charged to customers to go down.

What does that mean?

• FED has maintained the near-0% interest rate since March 2020 and the monthly purchases of at least $120m of government bonds and mortgage-backed securities (MBS) since June 2020. 

To my understanding, when the central bank buys bonds & other vehicles, it gives bank, and in turn, the economy, more money. This is how FED conducts the easy-money policies.

• However, government bond yields have recently increased strongly (the average 30-year-bond yield has risen over 3% since July).
  • One of the main reasons is the continuous bond issuance by the US Treasury Department to finance its fiscal budget deficit. Public debt is forecasted to reach 202% of GDP by 2021.

The increasing bond yields concern investors as they are the reference for loan interest rates, so such a rise would make it harder for businesses and households to borrow.

• Nonetheless, the FED chairman has not given any signs that FED would intervene. Instead of offering concrete solutions, Jerome Powell only mentioned that it’s starting to pay more attention to the recent increase in government bond yields
• The disappointment from investors sent the Down Jones down by 1.11%; S&P 500 by 1.34%; and Nasdaq down 2.11% after the interview. 

Content source: 
1. Trustville (2021) Trustflash 37.3 (Mar 1 – 7): Chủ tịch FED tái khẳng định duy trì chính sách tiền rẻ. Available at: https://trustville.vn/2021/03/08/trustflash-37-3-mar-1-7-chu-tich-fed-tai-khang-dinh-duy-tri-chinh-sach-tien-re/ [Accessed on Mar 8, 2021]
2. Kenton. W. (2019) Easy Money. Investopedia. Available at: https://www.investopedia.com/terms/e/easy-money.asp [Accessed on Mar 8, 2021]