The January Federal Open Market Committee meeting provided few surprises for Wall Street, according to Deutsche Bank Research:
"As expected, the Committee's post-meeting statement was little revised, with only a mark-to-market response to the recent softer data, and an acknowledgment that vaccine developments will be critical to the path of the economy. "
In the conference call that followed the release of the statement, Federal Reserve Chairman Jerome Powell recognized that things look better for the U.S. economy this year due to vaccines and fiscal policy. But he reiterated his dovish position on inflation, which makes any talk of a possible timeline for tapering of asset purchases "premature."
Ten months ago, the Fed launched an aggressive monetary easing that included cutting short-term interest rates near zero and a $120 billion bond buying program. It announced that it would keep these measures in place until the economy resumes growth and unemployment reaches its target level.
These measures were music to Wall Street's ears, which has been in a "party mode" since then. Low short-term interest rates and bond buying push investors into risky assets trading on Wall Street.
The FOMC's January statement had nothing in it to spoil the Wall Street party. Monetary policy will continue to be accommodative until the Fed sees the economy in full recovery and the risk of inflation getting above the historical target of 2%.
How long will that be? Possibly by December, according to DBR, provided that fiscal policy helps push economic growth to 6.3% this year, the unemployment rate dropping below 4.5% by year-end and core inflation ticking modestly higher.
But it could be much longer than that, as new data published on Wednesday shows the U.S.'s economic recovery is slowing. Gross domestic product—a measure of all goods and services' market value produces in a year—decreased by 3.5% from the prior year, the worst decline since 1946.
These numbers show the limitations of ultra-low short-term interest rates and bond buying programs. Initially, these measures have some success, helping the economy grow out of a recession. But they cannot place the economy into a sustainable growth path. Japan, the pioneer of low-interest rates and asset-buying programs, has avoided economic catastrophe. But it has seen its economy floundering in the swamp of stagnation, counting one lost decade after the other. And so have been Japan's equity markets, striving to reach the highs of 1989.
The bottom line: Easy can save the economy and Wall Street from disaster in the short term, but it cannot put them on a sustainable path.
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