The Fed has been signaling that their emergency Covid monetary stimulus will be ending soon.
Powell Says Economy No Longer Needs Aggressive Stimulus
Fed preparing to raise rates and shrink asset holdings, central bank chairman says
By Nick Timiraos, The Wall Street Journal, Updated Jan. 11, 2022
Federal Reserve Chairman Jerome Powell said he was prepared to begin raising interest rates to cool down the economy but that he also was optimistic that supply-chain bottlenecks would ease this year to help bring down inflation....Mr. Powell said he hoped there would be “a return to normal supply conditions” this year but added, “if we see inflation persisting at high levels longer than expected [and] we have to raise interest rates more over time, we will.”...
“It is really time for us to move away from those emergency pandemic settings to a more normal level,” Mr. Powell said. “It’s a long road to normal from where we are.”...
The unemployment rate, which fell to 3.9% in December, is now lower than it was four years ago, when Mr. Powell became Fed chairman. That is despite the upheaval wrought by the pandemic, which sent joblessness to a post-World War II record of 14.7% in April 2020.... [end quote]
The Fed has a long, long road to normal if you consider “normal” to be conditions that were stable for decades before the abrupt and extreme monetary actions of the Fed. Assuming that Jay Powell can read a table and a chart (a pretty fair assumption) he will see the level of normal and the very large changes needed to get back to normal…changes that would upset the asset markets that have become addicted to negative real yields.
The Fed’s actions during emergencies is valid. But, since 2001, they did not reverse the “emergency” monetary stimulus once the emergency had clearly ended.
The pressures have been building for decades. With Congress adding fiscal stimulus to monetary stimulus and the Covid pandemic snarling supply chains, inflation is rising. Powell is not ignoring the problem. He is observing that the pressures may continue even after the pandemic is over.
The asset markets will be affected by rising interest rates. Powell will surely be re-elected as Fed chair and he will act.