By Steven K. Beckner
- Want to See ‘Actual Progress’ Toward Employment, Inflation Goals
- Downplays Inflation, Financial Stability, Dollar Risks
(MaceNews) – Federal Reserve Chairman Jerome Powell again Wednesday signaled that the Fed will maintain its ultra-easy monetary policy stance unabated for the foreseeable future.
Powell, testifying for a second straight day on the Fed’s semiannual Monetary Policy Report to Congress, continued to downplay inflation and financial instability risks while highlighting unemployment, the level of which he again insisted is higher than headline measures suggest.
The Fed chief, appearing virtually before the House Financial Services Committee, reiterated his pledge that the Fed will provide plenty of advance warning ahead of any reduction in asset purchases. That in turn will proceed any interest rate hikes.
He strongly indicated neither tapering nor liftoff are on the horizon currently by saying the Fed will wait to see “actual data” showing progress toward its job and inflation goals.
Powell said the Fed would respond if inflation were to become “troubling,” but he sees that as very unlikely. He also dismissed concerns about the dollar losing its reserve currency role because of expansionary monetary and fiscal policies.
The Fed’s policy making Federal Open Market Committee will revise its economic and interest rate projections at its March 16-17 meeting, when it is expected to reiterate its plan to leave the federal funds rate in a zero to 25 basis point 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.”
It likely will reaffirm an intention 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.”
Financial markets are keen to know when and how the FOMC will determine “substantial further progress” has been made. Powell suggested he and his colleagues are not close to considering a “tapering” of bond buying.
“The economy is a long way from our employment and inflation goals, and it is likely to take some time for substantial further progress to be achieved,” he said, repeating prepared testimony delivered Tuesday to the Senate Banking Committee. He added the FOMC will “clearly communicate our assessment of progress toward our goals well in advance of any change in the pace of purchases.”
Powell underscored this cautious approach, which a day before he described as “patient,” in response to questions from members of the committee.
He said “there is reason for optimism about the second half of the year if we do get the pandemic under control,” but he emphasized, “we’re going to wait to see actual data … to act upon it.”
Powell’s basic message was that the Fed is falling well short of meeting both sides of its dual mandate. Although the unemployment rate has fallen to 6.3%, he said it is closer to 10% if those who have left the labor force are included.
“There’s a lot of slack in the labor market and there’s a long way to go to maximum employment,” he added. Meanwhile, inflation is running 1.4% year-over-year, he noted.
“We do expect inflation to move up both because of base effects … and because we could have a surge in spending as the economy reopens,” he said, “but we don’t expect that to be a persistent long run (trend) … . If does we have the tools to deal with it.”
There are supply chain constraints, such as a dearth of computer chips, Powell conceded, but “that doesn’t necessarily lead to inflation year after year…. . That doesn’t mean a higher inflation process … if inflation expectations remain anchored.”
If inflation moves up faster than expected, “We have the tools to deal with it,” he said, but he pointed out the United States and the world have been in a “disinflationary mode” since the 1970s.
Asked how close the Fed is to reaching its “exit” goals, Powell said the Fed wants to see “substantial further progress … actual progress – not forecasted progress. We would like to see actual incoming data showing us moving close to our goals, both for employment and inflation … . We will be communicating as clearly as possible and as far in advance as possible.”
Asked what the labor market will look like when the Fed starts tapering, he replied, “It’s easier to say with liftoff.” He referred to the FOMC statement that it will hold the funds rate near zero “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.”
“We haven’t tried to be as specific about” tapering, but there needs to be “substantial further progress,” he said.
Powell emphasized, “We won’t be tightening monetary policy just because of strong labor market… . We would have to see troubling inflation.” For now, he added, “what I see is an economy where there is still a great deal of slack.”
He said the Fed’s “forward guidance,” coupled with clear advance communication as the economy moves closer to Fed goals should help markets anticipate “when we will begin to taper asset purchases and when we begin to raise (the funds rate) … when the expansion is far advanced.”
“We have the tools in place,” he continued. “We think this is an appropriate policy stance.”
As on Tuesday, Powell faced concerns about financial “bubbles,” but again largely downplayed them. He conceded “some asset prices are elevated by some measures,” but described leverage and other risks as “moderate.”
He refused to comment on the $1.9 trillion fiscal stimulus bill making its way toward enactment, but he did not disagree with Treasury Secretary Janet Yellen’s exhortation to Congress to “act big.”
“We’re on an unsustainable fiscal path,” he said, and, “We need to get off that path … , but the time to prioritize those concerns is not now. The time to prioritize those concerns is when we’re at full employment.”
Powell also disputed allegations that the Fed is undermining the dollar.
The dollar is sound when inflation is low and when “the public has confidence in the currency, which they do, which the world does. That’s really what it comes down to – that people believe the United States currency is perfectly reliable and stable in value.”
When one representative cited 26% annual growth of the M2 money supply and charged the Fed is “diluting” and “destroying” the dollar, Powell replied, “There was a time when the monetary aggregates were important determinants of inflation. That has not been the case in a long time. The correlation between … M2 and inflation is just very very low, and you see that now when inflation is 1.4% year over.”
Powell bristled when the same congressman essentially charged the Fed with enabling the Treasury to finance deficit spending.
“That’s not at all what’s happening,” he retorted. “We don’t have to purchase (Treasury debt) … . We purchase it because it’s providing accommodative financial conditions and supporting the economy in keeping with our mandate. There is plenty of demand for U.S. Treasury paper around the world.”
“By the way, we issue debt,” he continued. ”We issue United States obligations in the form of reserves when we buy Treasuries. So we’re not actually changing the amount of obligations outstanding on the part of (the U.S. government). What we’re doing is substituting an overnight reserve for a Treasury bill. It has no effect on the overall outstanding obligations of the United States.”
As for concerns that falling Treasury bill rates could tip short-term interest rates into negative territory, Powell agreed “it could put downward pressure on short-term interest rates.” But he said the Fed has the tools to keep the federal funds rate within a low positive range, and said “that is going to tend to work against other short-term money market rates going too low.”
He said the Fed will soon be deciding whether to extend the emergency exclusion of U.S. Treasuries from banks’ supplementary leverage ratio, which expires on March 31. An extension would have the effect of enhancing liquidity conditions in Treasury markets.
As Powell was testifying, Fed Governor Lael Brainard was speaking, and she too suggested strongly that the FOMC should not rush to reduce monetary accommodation in any way. Echoing Powell in putting actual unemployment closer to 10%, she said she “will be looking for sustained improvements in realized and expected inflation and examining a range of indicators to assess shortfalls from maximum employment” before concluding there has been “substantial further progress.”
“Today the economy remains far from our goals in terms of both employment and inflation, and it will take some time to achieve substantial further progress,” she added.
—
Contact this reporter: steve@macenews.com
Content may appear first or exclusively on the Mace News premium service. For real-time delivery, contact tony@macenews.com. Twitter headlines @macenewsmacro.