Federal Reserve Chair Jerome Powell has not hit the inflation panic button. Photo: AFP / Kevin Dietsch/Getty Images

Prices of stocks and other assets have soared in recent weeks, but Federal Reserve Chair Jerome Powell on Wednesday said the central bank’s zero interest rate policy was not entirely to blame.

“If you look at what’s really been driving asset prices… in the last couple of months, it isn’t monetary policy. It’s the expectations about vaccines, and it’s also… fiscal policy,” he said at a press conference after concluding the Fed’s two-day policy meeting.

The US Congress last year approved two stimulus packages aimed at combating the Covid-19 pandemic, one costing US$2.2 trillion and another amounting to $900 billion. President Joe Biden, who took office last week, is pushing for another $1.9 trillion plan. 

While monetary policy “does play a role,” Powell said, the stimulus measures and vaccines “are the news items that have been driving asset values in recent months.”

The Fed chief’s comments about a “highly uncertain” economic outlook appeared to prick the nascent asset bubble, with major US stock indices dropping more than 2% by the close of trading.

Traders have been astounded in recent days by the surge in struggling video game retailer GameStop’s share price, after a group of amateur investors banded together over the online platform Reddit to fight the Wall Street funds that had pushed its price lower.

The Securities and Exchange Commission (SEC) as well as the White House each issued statements on Wednesday saying officials are monitoring the volatility in stock markets.

“Our economic team including (Treasury) Secretary (Janet) Yellen and others are monitoring the situation. It’s a good reminder, though, that the stock market isn’t the only measure of the health of our economy,” White House spokeswoman Jen Psaki told reporters.

Incoming US Treasury Secretary Janet Yellen has her work cut out for her when it comes to challenging China. Photo: AFP

The SEC said it is working with other regulators “to assess the situation” and the actions of market players as part of “our mission to protect investors and maintain fair, orderly, and efficient markets.”

Powell said the central bank’s main tool for keeping tabs on risky behavior is through financial market supervision and regulation, although he would not, in theory, rule out using higher interest rates to address inflated asset prices.

But the question remains as to whether trying to deflate an asset bubble through higher rates would do more harm than good, since that could reduce economic activity, he said.

The fate of the US economy depends on the course of the pandemic and the Covid-19 vaccine rollout, Powell said Wednesday.

“A resurgence in recent months of Covid-19 cases, hospitalizations and deaths is causing great hardship for millions of Americans and weighing on economic activity and job creation,” Powell said.

He said government spending programs have helped support the economy, but the United States needs to recover at least nine million jobs to reach the goal of full employment.

“Overall economic activity remains below its level before the pandemic, and the path ahead remains highly uncertain,” Powell told reporters. 

He spoke after the central bank’s policy-setting Federal Open Market Committee (FOMC) held its first meeting of 2021 and pledged to keep borrowing rates low until employment has recovered.

It was the first meeting under the presidency of Joe Biden, who took office last week and said defeating the Covid-19 pandemic and pushing through a $1.9 trillion economic rescue plan are his top priorities.

“Support from fiscal policy will help households and businesses weather the downturn as well as limit lasting damage to the economy that could impede the recovery,” the central bank chief said.

He also said he was “absolutely sure” he would be able to work well with newly-installed US Treasury Secretary Yellen, who was his predecessor as Fed chair and will lead the charge in pushing Biden’s stimulus plan through Congress.

Newly redesigned $100 notes lay in stacks at the Bureau of Engraving and Printing in Washington DC. Photo: Mark Wilson/ Getty /AFP.

After the coronavirus pandemic derailed the world’s largest economy, unemployment surged from a near-record low of 3.4% to nearly 15%, before ending last year at 6.7%.

However, Powell said the pandemic drove huge numbers of people out of the workforce, which means “the real unemployment rate is close to 10%.”

As the economy grapples with the world’s worst coronavirus outbreak, optimism about vaccines has raised hopes that activity can return to normal soon.

But there also have been some setbacks in vaccine distribution and supply, and the FOMC said the course of the recovery will depend “significantly” on the virus and those treatments.

Powell, who said he has received the first of two shots for his Covid-19 vaccine, cautioned that it will be “a struggle” to get enough people injected to achieve herd immunity.

After the US, like other countries, saw a resurgence of infections late last year, the FOMC noted that the recovery had “moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic.”

The FOMC again pledged to keep the benchmark lending rate low until the economy achieves “full employment,” in keeping with the Fed’s new policy stance.

Even before the pandemic struck, inflation was muted and since then has fallen far below the central bank’s two-percent target.

That prompted the central bank to shift its focus to helping the labor market recover, while accepting higher inflation for a while once the economy begins to grow more strongly.

Powell acknowledged that some prices might spike as sectors are able to return to normal, but those transitory effects would not be overly concerning.

Economists like Mickey Levy of Berenberg Capital Markets wondered what happens if inflation rises to two percent or above for a longer period.

“The Fed is comfortable with its current monetary policy stance. Fiscal policy has taken over the spotlight, which the Fed has willingly yielded. Let’s see how long this lasts,” Levy said in an analysis.

The Fed also committed to keeping its asset purchases at the pace of at least $120 billion per-month, and Powell said it is far too soon to even discuss the possibility of tapering the bond buying program.