– Too Soon To Think About QE Tapering or Liftoff from Zero Lower Bound
By Steven K. Beckner
(MaceNews) – Federal Reserve Governor Lael Brainard strongly indicated Wednesday that, as far as she’s concerned, the Fed will not be reducing the pace of asset purchases for a long time.
Indeed, Brainard spoke of the possible need to increase Fed bond buying from the current $120 billion per month in a webinar sponsored by the Canadian Association for Business Economics.
“The economy is far away from our goals in terms of both employment and inflation, and even under an optimistic outlook, it will take time to achieve substantial further progress,” she said in prepared remarks. “Given my baseline outlook, I expect that the current pace of purchases will remain appropriate for quite some time.”
In its Dec. 16 statement, the Fed’s policymaking Federal Open Market Committee 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.”
For her part, Brainard said that “in assessing substantial further progress, I will be looking for sustained improvements in realized and expected inflation and will examine a range of indicators to assess shortfalls from maximum employment.”
Answering questions virtually, she said asset purchases have been a crucial part of the Fed’s response to the pandemic and “have had a significant influence supporting the economy.” So, referring to the $80 billion of Treasuries, and $40 billion of MBS the Fed is buying every month, she said she and her colleagues “stand ready to increase those amounts if we judge that to be warranted.”
Brainard, long considered one of the more dovish members of the Board of Governors and the FOMC, said “the timeline for lifting the policy rate off the lower bound or adjusting asset purchases ill depend on realized inflation and realized employment.”
“We’re far from those goals currently,” she added. “So it’s too early to say how long it will take” to taper asset purchases or to lift off from the zero lower bound.
Brainard, who was appointed by President Obama, is considered a potential successor to Fed Chairman Jerome Powell when his term expires in February 5, 2022, if Powell is not reappointed to a second term.
Brainard and her fellow policymakers have putting a lot of emphasis on the need to get inflation up to 2% on average and over 2% “for some time” and to boost inflation expectations in the process.
Recently TIPS-based “break evens,” a closely watched measure of inflation expectations have risen considerably, with the 10-year breakeven going over 2%, while the 10-year Treasury note yield has climbed above 1%.
But Brainard seemed only partially pleased.
“Market expectations appear to have adjusted in response to the changes in the FOMC’s approach,” she observed. “The Survey of Market Participants conducted by the Federal Reserve….The median level of 12-month PCE inflation anticipated at the time of liftoff rose from 2 percent in the July survey to 2.3 percent in the September survey and beyond, following the introduction of” the Fed’s flexible inflation targeting framework.
But she added, “even though some of the survey-based measures of inflation expectations have picked up recently, they still remain close to the lower end of their historical ranges.”
“Market-based measures of inflation compensation have also picked up,” she continued. ‘While disentangling inflation expectations from liquidity and term premiums is imprecise, staff models attribute a significant portion of the movement in inflation compensation to an increase in expectations, bringing them up from the lows seen in March but still below their historical averages.”
In other comments when responding to questions, Brainard acknowledged that holding interest rates very low can induce “frothy” asset markets and said the Fed would need to remain “vigilant” against potential financial “vulnerabilities.”
However, she said, combating or containing such vulnerabilities is the job for “macro-prudential” or regulatory policy, not monetary policy, which she said must remain focused on the Fed’s “dual mandate” of maximum employment and price stability.
She also echoed many of her colleagues in saying that ongoing fiscal stimulus is needed, while acknowledging that the Fed’s ultra-low interest rate stance facilities debt financing.
With 10 million people still unemployed since the pandemic began, Brainard vowed, “we are committed to using our powerful tools for as long as it takes to get the economy back on track, achieve maximum employment and 2% inflation.”