Morning Report: Jerome Powell talks to 60 Minutes

Vital Statistics:

 LastChange
S&P futures4,115-5.4
Oil (WTI)60.471.15
10 year government bond yield 1.67%
30 year fixed rate mortgage 3.27%

Stocks are flattish this morning on no major news. Bonds and MBS are flat.

We kick off earnings season this week, with the big banks starting the show. We will get some important economic data with the Consumer Price Index on Tuesday, Industrial Production on Thursday and Housing starts on Friday.

Fannie Mae and Freddie Mac will stop purchasing loans under the GSE patch starting on July 1. This means they will no longer accept loans with debt-to-income ratios above 43%. This is interesting given that the CFPB has proposed extending the patch to October 2022.

Fed Chairman Jerome Powell went on 60 Minutes yesterday and talked about the state of the economy. Here is the transcript. Nothing was said that could be considered market-moving, although he did discuss the Fed’s thinking regarding inflation as the economy improves:

SCOTT PELLEY: What the Fed has done traditionally is use economic models to predict inflation and then raise interest rates, tap the brake if you will, before inflation happens. Is that what you’re planning on doing?

JEROME POWELL: No, it’s not. And really, what we’ve done is we’ve updated our understanding of the economy and therefore, our policy framework to the way the economy has evolved. The economy has changed. And what we saw in the last couple of cycles is that inflation never really moved up as unemployment went down.

We had 3.5% unemployment, which is a 50-year low for much of the last two years before the pandemic. And inflation didn’t really react much. That’s not the economy we had 30 years ago. That’s the economy we have now. That means that we can afford to wait to see actual inflation appear before we raise interest rates. Now, we don’t want inflation to go up materially above 2% and go back to, you know, the bad, old inflation days that we had when you and I were in college back a long time ago. But at the same time, we do have the ability to wait to see real inflation. And that’s what we plan on doing.

Overall, the Fed is sticking with its base case scenario that the second half of 2021 will be exceptionally strong, perhaps the strongest in 30 years. That said, there are still about 9 million fewer people working than there were pre-pandemic and a lot of small businesses have closed. It will take time for those people to find jobs and new businesses to emerge to replace the closed ones.

Powell has changed his thinking even over the course of his term regarding tapering and getting off the zero bound. The labor market index is roughly at the same place today as it was in 2013 when Powell began urging the Fed to reduce purchases of Treasuries and MBS. As the article notes, we are going to see a spike in inflation simply because prices during the lockdown days of 2020 were artificially low. Of course that doesn’t tell the whole story; supply chain bottlenecks are driving prices higher as well, although those should be temporary. Ultimately people’s perception of inflation is largely driven by prices at the gas pump, and the summer driving season begins soon.

Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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