Powell Refuses to Bite on GameStop or Tapering

(Bloomberg Opinion) -- Federal Reserve Chair Jerome Powell was in no mood on Wednesday to humor questions about the meteoric rise in shares of GameStop Corp. and other “meme stocks.”

In what was probably the most combative press conference since the onset of the Covid-19 pandemic, he set the tone early by stating, “I don’t want to comment on a particular company or day’s market activity” in response to the first question about GameStop. “The connection between low interest rates and asset values is probably something that’s not as tight as people think,” he said a bit later, arguing that “if you look at what’s really been driving asset prices in the last couple of months, it isn’t monetary policy, it’s been expectations of vaccines and fiscal policy.” Then he scoffed in response to a question from my Bloomberg colleague Michael McKee about whether he and other officials would consider adjusting Regulation T, which sets initial margin requirements, to head off excess speculation: “No, we haven’t done that.”

Powell clearly wanted to keep the focus on the Fed’s primary mandate of maximum employment and stable prices. The Federal Open Market Committee, as expected, left the fed funds rate unchanged in a range of 0% to 0.25% and didn’t touch the size of its asset purchases after its two-day meeting, though it did change the language in its statement to note that the pace of the economic recovery “has moderated in recent months.” That’s likely a nod to the jobs report released since the central bank’s last meeting, which showed U.S. nonfarm payrolls fell in December by 140,000 from the previous month, a much sharper drop than expected.

For the first time in several months, Powell has the wind of fiscal policy at his back and did not need to resort to using his post-FOMC meeting press conference as a bully pulpit for additional economic support from the U.S. government. In December, I wrote that Powell recognized the Fed’s limits and punted to Congress rather than have the central bank take new measures itself; he left no doubt about what the economy needed when he said “the case for fiscal policy right now is very, very strong, and I think that’s widely understood.”

Yet even with the latest package from Washington, which led Powell to describe the fiscal policy response to the pandemic as not just “strong” but also “sustained,” he reiterated that the economy is “a long way away from a full recovery.” And just as he grew visibly frustrated with questions about GameStop, he was similarly irritated with the idea of paring back the central bank’s $120 billion in monthly asset purchases.

“In terms of tapering, it’s just premature. We just created the guidance. We said we wanted to see substantial further progress toward our goals.”

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“It’s just too early to be talking about dates, we should be focused on progress, we’ll need to see actual progress, and when we see ourselves getting to that point, we’ll communicate clearly about it to the public, so nobody will be surprised when the time comes. And we’ll do that well in advance of actually considering what will be a pretty gradual taper.”

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“Honestly, the whole focus on exit is premature.” 

When investors see individual stock prices double each day, surging housing prices and corporate-bond spreads near record lows, it’s not hard to understand why they look to the Fed to take away the proverbial punch bowl. But Powell has been clear for a long time that he’s not going to stop the party, no matter what asset prices might look like, given the dismal unemployment and inflation numbers. He practically implored the reporters to look at the real human toll of the pandemic rather than the massive financial-market gains:

“There are people out there who’ve lost their jobs; it’s essential that we get them back to work as quickly as possible and we want to do everything we can to do that. That’s our primary focus right now.”

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“I’m much more worried about falling short of a complete recovery and losing people’s careers and lives that they’ve built because they don’t get back to work in time. I’m more concerned about that, and the damage that will do, not just to their lives, but to the productive capacity of the economy.”

In something of a stream-of-consciousness moment, he openly pondered what would happen if the Fed raised interest rates and reduced economic activity to help deflate asset bubbles. “Will that even help?” he asked. Or, “will it actually cause more damage?” I should add that the benchmark 10-year Treasury yield fell below 1% ahead of the Fed meeting for the first time since Jan. 6 in a sign that investors see lower-for-longer rates and potentially subdued growth and inflation.

As captivating as the share price of GameStop, AMC Entertainment Holdings Inc. and other companies might be, Powell is never going to get dragged into debating the merits of protecting short-selling hedge funds from individual investors on Reddit, or protecting newbie options traders from themselves. He is one of the primary stewards of the world’s largest economy and is tasked with steering it into the future. Right now, the labor market is still in rough shape. Having entire industries displaced for almost a year is a far more alarming issue for the Fed than meme stocks trading at elevated prices for a week or two, to say nothing of the grim Covid-19 milestones that the world keeps reaching. As my Bloomberg Opinion colleague Tim Duy quipped on Twitter: “He just doesn’t find GameStop as interesting as everyone else does.”

There are, of course, many reasons to argue that what’s happened over the past week in markets is nothing short of a “revolution.” But that doesn’t mean it should lead to a drastic change in thinking inside the Eccles Building. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

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