– Taper Could Begin Early Next Year Following December Decision
By Steven K. Beckner
(MaceNews) – Chicago Federal Reserve Bank President Charles Evans sounded noticeably less reluctant to begin scaling back asset purchases Tuesday.
Evans, talking to reporters via Webex, said the economy is “well on its way” to meeting the Fed’s employment and inflation objectives.
Evans, a 2021 voting member of the Fed’s policy-making Federal Open Market Committee, suggested that “tapering” of asset purchases could begin in January following a December FOMC announcement.
But Evans stressed that the pace of tapering and ultimately the pace of increases in the federal funds rate is more important than the exact date tapering begins. But he was vague about what the pace should be.
He did not appear to support a faster reduction in purchases of mortgage-backed securities.
Evans voted on July 28 to leave the federal funds rate in a zero to 25 basis point target range and to keep buying $120 billion of bonds per month “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”
In mid-July, Evans said, “it’s going to take a few months, probably more than just a few months” to make a determination that sufficient progress has been made toward the Fed’s employment and inflation objectives and, hence, move to scale back asset purchases. “I kind of think that by the fall we’re going to be able to see this better.”
Now, in wake of the strong July employment report, Evans seemed much more certain that the FOMC is nearing a determination of “substantial further progress” and a tapering announcement.
On Friday, the Labor Department reported that non-farm payrolls rose a larger than expected 943,000 in July and substantially revised June payroll gains upward to 938,000. The unemployment rate dropped from 5.9% to 5.4% despite a one-tenth increase in labor force participation, and average hourly earnings grew 4.0% year-over year, up from 3.6% in June.
“I think we’ve made a lot of progress,” he said. “I think the last two employment reports have been very strong …” following a string of disappointing reports.
“So, I’m very optimistic about that,” Evans continued. “I do think the unemployment rate is going to be 4 1/2% by the … end of year – in that ballpark. And that involves a very substantial increase in employment ….”
“I think we’re definitely coming up to the time when it’s going to be appropriate to start correcting that, and tapering seems to be the word,” he went on, although he added that he’d “like to see a few more employment reports.”
At another point in the joint interview with reporters, Evans said, “we’re well on our way to be being able to make some adjustments.”
Evans has been more eager to achieve and sustain a compensatory overshoot of inflation than most, but he said he is “reasonably comfortable that the inflation data are going to be coming back in line with some of my concerns about risks from the effective lower bound.” But he said, “I’m also going to have to be mindful of that as we get more inflation reports.”
As more employment data come in, he said, “I think we’re going to have more confidence in the economy.”
Referring to speculation about whether tapering comes in September, November, December or January, Evans deemphasized the importance of the timing.
“I don’t think that one meeting on either side is going to have an important effect on the accommodative stance of monetary policy,” he said. “What’s most important is that everyone understands that we’re in it to get to the economy to maximum, inclusive employment and also inflation to average 2% over time.”
“I think that’s the most important part. It’s going to be the messaging, and the precise timing I think is a little bit less important,” he added.
Evans said, “choosing a pace of tapering is probably as important as the date you want it to end as anything else.”
But Evans did not seem to think the amount of monthly tapering is vitally important. “When we decide to taper, our language about what we’re trying to achieve, the transition mechanism by which we’re trying to achieve our dual mandate objectives is just as important as the actual quantities.”
When the FOMC last tapered asset purchases, it made the initial announcement at its December 2013 meeting and began the actual cuts in January – $5 billion each of MBS and Treasuries. It continued tapering at that monthly pace until purchases were reduced to zero in October 2014.
Evans said the FOMC should be prepared to vary or even pause the pace of tapering depending on economic conditions.
After tapering ended in October 2014, the FOMC delayed raising the funds rate in December 2015, but Evans pointed out that international financial forces caused much of the delay. Liftoff could come earlier after the end of tapering this time, he implied.
Tapering and liftoff must be looked at together, he suggested. “In conjuction with the funds rate path, once we eventually lift off, that ends up providing the best assessment of whether or not we’re extraordinarily accommodative, we took our foot off the gas, we’re actually getting to neutral or maybe we’re being a little more restrictive.”
“It’s all important. It’s got a lot of all those features … when you’re thinking about making adjustments,” he added.
Evans also emphasized the importance of how the FOMC’s eventual tapering announcement is received and interpreted. “I think much more about this is about when we take action is the public and markets going to say, ‘yes, the Fed is now much more confident that the path of the economy …. We’re on our way, we’re seeing the outcomes in line with our long-run framework.’”
Evans was reluctant to specify a date for when the FOMC will decide enough progress has been made to begin tapering, but said, “I do expect we’re going to be at the point where we’ve seen substantial further progress …probably later this year.”
“I don’t think it’s’ going to be into next year,” he continued. “It might actually start (early next year) if it’s a December judgment .…”
As for MBS purchases, Evans said they are important for “market functioning,” not just for helping the now vibrant housing market and endorsed New York Fed President John Williams position that they should continue in tandem with Treasury purchases.
Evans’ remarks come in the wake of comments by other FOMC voters that seem to reflect a growing readiness to lessen the degree of stimulus the Fed is providing a recovering economy. On Monday, Atlanta Fed President Raphael Bostic advocated a “relatively fast’ approach to tapering and said he’s “thinking in the October-to-December range.” He allowed for an even quicker pace “if the (employment) number comes back big” again.
“We are well on the road to substantial progress toward our goal….,” Bostic said. “My sense is if we are able to continue this for the next month or two I think we would have made the ‘substantial progress’ toward the goal and should be thinking about what our new policy position should be.”
Richmond Fed President Barkin said he thinks “it is fair to say on the price side we made substantial progress, maybe more than substantial progress.” But he added, “I believe there is still more room to run in the labor market.”
—
Content may appear first or exclusively on the Mace News premium service. For real-time delivery, contact tony@macenews.com. Twitter headlines @macenewsmacro.