–‘Economy Still Far From’ Fed’s Employment, Inflation Goals
–Must ‘Clearly Communicate’ ‘Well in Advance’ of LSAPs Tapering
–‘Important To Abstract’ from ‘Temporary’ Factors Pushing Up Inflation
By Steven K. Beckner
(MaceNews) – Federal Reserve officials seemingly were looking far down the road when thinking about slowing the pace of asset purchases at their Jan. 26-27 Federal Open Market Committee meeting, minutes released Wednesday show.
The FOMC minutes also reveal that, when the time comes to “taper” asset purchases, the Fed will focus on clearly signaling their intentions “well in advance.”
FOMC participants had little concern that their aggressive monetary easing, coupled with massive fiscal stimulus, would unduly increase inflation, the minutes show. On the contrary they largely dismissed inflation fears. Nor were they particularly pleased with the employment gains achieved so far.
And the minutes reflect a greater concern with downside risks than upside ones.
In its Jan. 27 policy statement, the FOMC reiterated it wants to “achieve inflation moderately above 2% for some time so that inflation averages 2% over time and longer-term inflation expectations remain well anchored at 2%.” And it “expect(ed) it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.”
The FOMC also said again that 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.”
Ever since that “forward guidance” was first enunciated in December, market observers have been wondering just what “substantial further progress” means and when the FOMC will being “tapering” or otherwise adjusting the Fed’s asset purchase program.
The minutes don’t directly answer those questions, but they do suggest that the process of deciding to start the tapering process may be glacial unless the economy significantly outperforms expectations.
Referring to the stated prerequisite of “substantial further progress toward its employment and inflation goals,” the minutes say, “With the economy still far from those goals, participants judged that it was likely to take some time for substantial further progress to be achieved.”
Whenever that determination is made, the minutes say “various participants noted the importance of the Committee clearly communicating its assessment of progress toward its longer-run goals well in advance of the time when it could be judged substantial enough to warrant a change in the pace of purchases.”
The minutes are not specific about how exactly the forward guidance on asset purchases will be implemented, but they say “participants noted that the Committee’s current guidance was well suited to the current environment because it describes how policy would respond based on the path of the economy.”
“For example, if progress toward the Committee’s goals proved slower than anticipated, the outcome-based guidance would convey the Committee’s intention to respond by increasing monetary policy accommodation through maintaining the current level of the target range of the federal funds rate for longer and raising the expected path of the Federal Reserve’s balance sheet.,” the minutes add.
Since the FOMC met, some voters have strongly indicated that, as far as they are concerned, tapering won’t happen until early next year, at the earliest.
For example, San Francisco Federal Reserve Bank President Mary Daly told the Wall Street Journal Tuesday, “if you take the lens of my modal outlook, then it’s really continuing to purchase at the current pace through the end of this year, and then should the economy deliver the robust growth in the second half of the year that we’ve – that I’ve projected, and continue to be on firm footing going forward, then I can see the need to keep the current pace as not being as critical.”
“But for 2021, keeping the current pace throughout this year, and thinking about as the economy evolves, reducing the pace of purchases in 2022,” Daly added.
Chicago Fed President Charles Evans, another voter, had previously suggested he sees no early exit from the $120 billion monthly bond buying regime, telling reporters last week he and his colleagues “haven’t started that conversation” about when there would be sufficient “further progress” to consider reducing the pace of bond buying.
As for gauging progress toward the 2% average inflation goal, the minutes suggest policymakers will be very patient and cautious.
“Participants emphasized that it was important to abstract from temporary factors affecting inflation – such as low past levels of prices dropping out of measures of annual price changes or relative price increases in some sectors brought about by supply constraints or disruptions – in judging whether inflation was on track to moderately exceed 2 percent for some time,” say the minutes.
Elsewhere, the minutes report that “many participants stressed the importance of distinguishing between such one-time changes in relative prices and changes in the underlying trend for inflation, noting that changes in relative prices could temporarily raise measured inflation but would be unlikely to have a lasting effect.”
“Some participants further observed that 12-month PCE inflation was likely to move somewhat above 2 percent for a brief period in the spring as the unusually low monthly observations from last spring roll out of the 12-month calculation,” they add.
Fed officials have been putting great emphasis on inflation expectations and the need for them to rise to help the Fed achieve its average 2% infaltion goal, and the minutes say “some participants pointed to the continued increase in market-based measures of inflation compensation from the very low levels recorded in the spring as consistent with the view that inflation was likely to move up gradually over time; others noted that survey-based measures were little changed, on net, over the year as a whole.”
The FOMC also seems to have downplayed the gains in employment made since the pandemic slammed the U.S. economy last March. Clearly they wanted more.
“While labor market conditions had improved significantly, on balance, since the spring, some participants noted that if the sizable number of workers who reported having left the labor force since the beginning of the pandemic were to be counted as unemployed, the unemployment rate would be substantially higher,” say the minutes.
“Participants observed that the economy was far from achieving the Committee’s broad-based and inclusive goal of maximum employment and that even with a brisk pace of improvement in the labor market, achieving this goal would take some time.”
That echoes a recent observation by Chairman Jerome Powell that unemployment would be closer to 10% than January’s 6.3% if those who’ve left the labor force were included.
FOMC participants were restrained in their optimism: “Over the medium term, participants expected strong growth in employment, driven by continued progress on vaccinations and an associated rebound of economic activity and of consumer and business confidence, as well as accommodative fiscal and monetary policy. However, participants observed that the economy was far from achieving the Committee’s broad-based and inclusive goal of maximum employment and that even with a brisk pace of improvement in the labor market, achieving this goal would take some time.”
As Powell has also indicated, the FOMC was focused on downside risks at the January meeting: “Participants generally viewed the risks to the outlook for inflation as having become more balanced than was the case over most of 2020, although most still viewed the risks as weighted to the downside.”
The minutes also say “a number of participants commented on issues related to financial stability” outside of the banking system.
“Several participants noted that the pandemic had highlighted structural vulnerabilities in other parts of the financial system,” they say. “These included run-prone investment funds in short term funding and credit markets as well as fragilities in Treasury market functioning; stresses stemming from these vulnerabilities had required substantial intervention by the Federal Reserve in the turbulent market conditions at the onset of the pandemic.”
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Contact this reporter: steve@macenews.com
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