— Vows To Communicate Very Clearly To Markets To Avoid 2013-style ‘Taper Tantrum’
By Steven K. Beckner
(MaceNews) – Federal Reserve Chairman Jerome Powell stressed Thursday that the Fed is far from “exiting” either its zero short-term interest rate stance or its aggressive asset purchase program and proclaimed that the Fed will clearly communicate its intentions when it comes time to “gradually taper” those purchases.
In the meantime, Powell suggested it is not even prudent to talk about “exit” or “tapering” strategies in a conversation with Princeton University Bendheim Center for Finance Director Markus Brunnermerier.
For the foreseeable future, the Fed chief said he and his fellow monetary policymakers are focused on getting back to full employment as soon as possible and are not worried about potential upward inflation pressures. They are much more concerned about inflation being too low.
Powell repeated that the Fed won’t raise interest rates even if unemployment falls below the Fed’s “natural rate” or NAIRU estimate unless it sees signs of excessive inflation pressures, and he made clear he sees little danger of the latter. Even if inflation picks up in coming months as consumer spending rebounds, any increase is unlikely to be “persistent,” he said.
Powell’s comments came 12 days before the Fed’s rate-setting Federal Open Market Committee holds its first meeting of 2021.
In its Dec. 16 statement, the FOMC said it “will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”
Powell gave every indication those policies and “forward guidance” are likely to continue for some time to come.
When asked about the Fed’s “exit” timing and the danger of the kind of “taper tantrum” that occurred in 2013, Powell took pains to respond very cautiously.
“Now is not the time to talk about exit,” he began.
“That is another lesson of the global financial crisis – to be careful not to exit too early and, by the way, try not to talk about exit all the time … because the markets are listening,” Powell continued. “The economy is far from our goals, and … we are strongly committed to our framework and using our monetary policy tools to do the job.”
He said, “The taper (2013) tantrum … highlights the real sensitivity that markets can have on asset purchases, so we know we have to be very careful in communicating about asset purchases.
Powell issued “a couple of general caveats: We always try to avoid an excessive focus on a particular likely path or modal path of the economy, because monetary policy is only sometimes about the most likely path, it’s often about … risk management to avoid downside cases. So that’s a little bit why our guidance on both rates and asset purchases is not time-based, it’s outcomes; it requires the achievement of various objectives, and those objectives will come when they come, not (by) the calendar. … You really can’t do that.”
“We will of course be very very transparent as we get closer,” he went on. “So I would just say this on the current situation: when it does become appropriate for us to discuss specific dates – and that will be when we have clear evidence that we are making progress toward our goals and are on track to make substantial further progress toward our goals – when that happens and when we can see that clearly we will let the world know.”
“We will communicate very clearly to the public, and we will do so well in advance of active consideration of beginning a gradual tapering of asset purchases,“ he concluded.
Though “optimistic” about the economy’s prospects,Powell suggested the Fed has far to go before it would begin such an “active consideration.”
“We’re still a long way from full employment,” he said, adding that the U.S. is “unlikely to get wage pressures” that might lead to excessively high inflation. The bigger concern is that inflation will remain “too low,” he said.
If the Fed is to achieve its goal of 2% average inflation and, in the process, letting inflation overshoot that target “for some time,” Powell stressed the importance of anchoring inflation expectations around 2%. In that regard, he expressed gratification that financial markets have boosted those expectations.
“Market participants now expect no rise in interest rates until inflation reaches 2% and we reach maximum employment,” he said, adding, “we are not going to raise interest rates just because unemployment is well below the natural rate of unemployment.”
“That wouldn’t be a reason to raise interest rates unless we see signs” that inflation is accelerating at a pace that “could disrupt” the economy, he said.
Powell said “the thing we’re most focused on is getting back to strong labor market quickly enough that people’s lives can get back to where they want to be. We were in a good place in February of 2020, and we can get back much sooner than we had feared.
As he has before, Powell credited fiscal policy for moderating the Covid lock down-induced recession and supporting recovery. He acknowledged that federal deficit spending and the accompanying increase in federal debt is on an “unsustainable” path.
But he said the level of federal debt level is “far from unsustainable,” and he said the United States is “a long way from fiscal dominance” – a scenario in which a government’s debt has become so large and costly that the central bank comes to focus primarily on helping the government fund its obligations.
The debt “doesn’t impact monetary policy now,” Powell asserted.