But ‘Straws In the Wind’ Bear Watching
By Steven K. Beckner
(MaceNews) – Since the Federal Reserve’s policymaking Federal Open Market Committee left its lax monetary stance in place on April 28, there has been a flurry of comments by Fed officials, but their main thrust has been to reinforce the likeklihood that the FOMC remains far from any kind of policy firming.
True, Dallas Federal Reserve Bank President Robert Kaplan raised some eyebrows (and confirmed some market players’ hopes) last Friday, when he hinted at an earlier-than-expected tapering of asset purchases.
“We are now at a point where I’m observing excesses and imbalances in financial markets,” Kaplan told the Montgomery Area Chamber of Commerce, pointing to the elevated stock market, credit spreads, and a “historically” robust housing market. “I do think, at the earliest opportunity, I think it would be appropriate for us to start talking about adjusting those purchases,” referring to the Fed’s $120 billion in monthly bond buying.
As time goes on, we’re sure to hear more of this kind of thing. If and when we do the odds may grow that, by year’s end, the FOMC could start considering tapering, perhaps even giving advance warning of some moderate scaling back of purchases by the middle of next year.
But for now Kaplan is an outlier. Just as one robin doesn’t make a spring, one dove doesn’t herald a policy shift.
For now, the pattern remains that Fed leaders and voting members of the FOMC generally continue to leave tapering, much less rate hikes, beyond the horizon.
The core of FOMC voters still seemed steadfast in supporting a near zero funds rate target and aggressive quantitative easing in a rush of commentary over the past three days.
Chairman Jerome Powell didn’t say a lot at a Community Reinvestment event Monday, but he reiterated said that although the economic outlook has “clearly brightened,” and “the recovery is gathering strength,” it has been “uneven” and “slower for those in lower-paid jobs.”
“We are not out of the woods yet, but I am glad to say that we are now making real progress.” said Powell, who before the FOMC meeting had said the economy was “at an inflection point.”
New York Federal Reserve Bank President (and FOMC Vice Chairman) John Williams sounded equally upbeat, but said the economy still needs monetary accommodation.
“While I am optimistic that the economy is now headed in the right direction, we still have a long way to go to achieve a robust and full economic recovery,” he told the Women in Housing and Finance Monday.
What’s more, Williams largely dismissed inflation risks, predicting it will come back down to 2% next year.
The next day, voting Richmond Federal Reserve Bank President Thomas Barkin also downplayed fear that inflation will keep rising persistently beyond this year, while stressing he wants to see an increase in the employment-population ratio.
Anticipating a strong April employment report Friday, Barkin said, “I’d like to see that growth,” but “as I said about inflation, when we get there, then we get there. But we haven’t gotten there yet.”
San Francisco Federal Reserve Bank President Mary Daly, another 2021 voter, said there’s only been a couple of months of “really good data,” and “there’s also a big hole to dig out of.”
“We’re a long way from achieving our full employment and price stability goals, so it’s not really the right time to start talking about normalization,” Daly said.
Asked when the Fed should taper, Daly replied, “When we are much closer to achieving our dual mandate goals than we are now … . We have an optimistic outlook, a long way to go, and we are not out of the woods yet.“
Nor did voting Chicago Federal Reserve Bank President Charles Evans sound ready Wednesday to become any less aggressively expansionary in his speech to the Hyman P. Minsky Conference on the State of U.S. and World Economies.
Evans did say he is “encouraged by the recent pace of the economic recovery, and I remain optimistic that this strength will continue in the coming months.”
But Evans went on to say, “I expect monetary policy will have to remain accommodative for some time to ensure that we meet the policy goals laid out in our new framework,” even though he also said “our employment mandate is within sight” relative to FOMC projections.
Evans said the possibility of an “accelerationist” inflation scenario is “remote” and said he wants to see both inflation and inflation expectations move up.
”So, I see the need for continued accommodative monetary policy to reach our goals,” Evans said. “Policy is likely on hold for some time.”
Meanwhile, Fed Governor Michelle Bowman pointed to “strong signals of momentum building in the economy” as she addressed the Colorado Forum.
However, she was quick to add that “the economic recovery is not yet complete, and the uncertain course of the pandemic still presents risks in the near term.”
“Despite the progress to date and the signs of acceleration in the recovery, employment is still considerably short of where it was when the pandemic disrupted the economy and it is well below where it should be, considering the pre-pandemic trend,” Bowman said. “In particular, our maximum employment mandate is intended as a broad and inclusive goal increasing employment and opportunity, but I remain concerned that employment gains for some minority groups have lagged behind those of others.”
Echoing her fellow policymakers, Bowman acknowledged inflation will rise in coming months, but said, “At this point, the risk that inflation remains persistently above our long-run target of 2% still appears small.”
Bowman described monetary policy as being “in a good place.”
“The economic recovery is not yet complete, and the uncertain course of the pandemic still presents risks in the near term, which is why my colleagues and I on the FOMC decided last week to maintain our highly accommodative stance of monetary policy,” she said.
It all sounds much like more of the same. But don’t be too hasty. There have been some straws in the wind:
Officials have been speaking much more optimistically, and that has to be seen as a precondition for eventual tightening.
Notably too, Powell seemed to go out of his way to backdate the measurement of economic progress recently: “If you look at the sense of our guidance, we will reach the time when we will taper asset purchases when we’ve made substantial further progress toward our goals, from last December when we announced that guidance.”
Although the rise in inflation is deemed “transitory,” officials are speaking of limits on what kind of overshoot would be acceptable. Evans has said 2.5% to 3% would be okay. But new Fed Governor Christopher Waller said, “I don’t think anybody would be very comfortable if it got to three or three plus and stayed there for a while.”
Powell and others continually utter the caveat that the Fed has and will “use its tools” to combat inflation if it starts to look “troubling.”
The Fed is closely watching inflation expectations including its own index of common inflation expectations (CIE), and Fed Vice Chairman Richard Clarida says the staff is “thinking and working hard” on models tying the timing of liftoff to the behavior of inflation and inflation expectations.
We’ve also been hearing more wariness about the “reach for yield” in financial markets.
Too much shouldn’t be made of any of these “straws in the wind,” but it could be argued that policymakers are in the early stages of setting the conditions for tapering and liftoff and laying the groundwork for eventual tightening.
At the very least, they have established a framework for adjusting Fed communications, when the time comes, to signal policy adjustments are imminent.
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Contact this reporter: steve@macenews.com.
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