Fed needs to ‘rely’ on asset purchases and forward guidance to achieve maximum employment

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While economic recovery continues, the pace could be slowing modestly, according to Federal Reserve Board Chair Jerome Powell, who again said fiscal relief is needed.

And while he called Friday's employment report "good," in a National Public Radio interview, he added, "to get us back to full employment, we’re going to have to get the disease under control.”

“With the Fed disinterested in negative interest rates, it will need to rely on asset purchases, forward guidance, and credit support to help it achieve maximum employment,” said Joseph Kalish, chief global macro strategist for Ned Davis Research Group. “Treasury purchases will gradually shift more toward the long-end to match issuance. We see little change to forward guidance, as rates will remain low for years. As long as yields behave, there is little incentive to implement explicit yield curve targets. The Fed will continue to tweak its Main Street Lending program, which has finally crossed the $1 billion mark.”

Joseph Kalish, chief global macro strategist for Ned Davis Research Group

Compared to the Great Recession, the market this time, seems “to get” the Fed’s message. Short-term yields are comatose," he said. "Even longer-term yields are showing muted volatility.”

Regional Fed presidents Charles Evans of Chicago and Neel Kashkari of Minneapolis have harped on the urgent need for more stimulus, but the better-than-expected employment report last week could impact lawmakers’ willingness to come to an agreement.

Small business optimism
Small business optimism climbed to levels "slightly above the historical 46-year average," according to the National Federation of Independent Business.
The group's index rose to 100.2 in August from 98.8 in July.

“Small businesses are working hard to recover from the state shutdowns and effects of COVID-19,” according to Bill Dunkelberg, NFIB’s chief economist. “We are seeing areas of improvement in the small business economy, as job openings and plans to hire are increasing, but many small businesses are still struggling and are uncertain about what the future will hold.”

Seven out of the 10 index components gained in the month.

"The Uncertainty Index rose 2 more points in August to 90, the second highest reading since March 2017," according to the report. "As uncertainties are resolved, and the future becomes clearer (good or bad), firms will revisit capital spending plans."

Employment trends
The Conference Board Employment Trends Index rose to 52.55 in August from 51.37 in July, the fourth month in a row it grew, according to the board on Tuesday.

On a year-over-year basis, the ETI is down from 109.76.

“Despite the rise in new COVID-19 cases at the beginning of the summer, job growth continues to gain momentum,” according to Gad Levanon, head of the group's Labor Markets Institute. “Over the coming months, job growth will persist as industries impacted by social distancing such as travel, hotels, restaurants, and personal care will continue to recover. However, another wave of infections this fall would limit the expansion of the U.S. labor market.”

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Monetary policy FOMC Federal Reserve Economic indicators Jerome Powell