– Would Be ‘Challenging’ To Cut MBS More Than Treasury Purchases
By Steven K. Beckner
(MaceNews) – Chicago Federal Reserve Bank President Charles Evans pointed Thursday toward “the fall” for the Fed to make a determination that sufficient progress has been made toward to the Fed’s employment and inflation objectives and, hence, move to scale back asset purchases.
Evans said he does not have a specific time in mind for actual “tapering” of Fed bond buying, but given the Fed’s commitment to giving plenty of advance notice, his comments could be interpreted as suggesting that the first cuts might not come until sometime in early 2022 .
Evans, a 2021 voting member of the Fed’s policy-making Federal Open Market Committee, implied he would likely favor continuing purchases of Treasury and agency mortgage backed securities in the current proportions, rather than prioritize tapering of MBS buying.
Evans was upbeat about the economic outlook in a webinar hosted by the Global Interdependence Center, forecasting 7% real GDP growth this year, with the unemployment rate falling to 4 ½% by the end of 2021, followed by growth of 3% and sub-4% unemployment next year. In line with most of his colleagues, he anticipated that inflation will fall to a little over 2% next year after running at least 3% this year.
Evans remarks came a day after Fed Chairman Jerome Powell told the House Financial Services Committee the FOMC will discuss the size and composition of Fed asset purchases at its July 27-28 meeting. He made similar comments Thursday before the Senate Banking Committee.
Evans voted June 16 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.” But after the meeting, Powell said, “we will begin meeting by meeting to assess that progress” and “clarify our thinking” as to “when and how to adjust the pace and composition of asset purchases” – guidance he repeated this week.
Predictably, Evans was peppered with questions about the timing of tapering and the prerequisite determination of “substantial further progress.”
“It’s going to take a few months, probably more than just a few months (to make a judgement on ‘substantial further progress’),” he told reporters following the webinar. “I kind of think that by the fall we’re going to be able to see this better.”
By fall, “we’ll be making some judgments,” he said. “I mean, I’m looking for substantial further progress.”
“I have to say that if unemployment comes in securely at 4 ½% at the end of this year, if the way those gains are distributed is in line with reasonably vibrant labor market where large numbers of people are sharing in that, that would be excellent progress,” Evans elaborated.
“I think if inflation looks like it’s not off the tracks in terms of being well above transitory, temporary inflation that I’m seeing right now, then I can easily imagine a discussion about our tapering, where a judgment is made that, yes, that does seem like substantial further progress,” he continued.
“I don’t have a month in mind, but I can see the trajectory of that,” he added.
Evans said the “lagged effect” of supply shortages and other covid-related forces on prices “is why I think we could require a little time than many people would prefer” to come to a policy decision.
“Certainly, I’ d like to have the answer today, but that is just part of what we need to do,” he said. “I am comfortable with where we’re going and I don’t see markets as being uncomfortable, especially given the yield curve and how that’s playing out. So, I think we’re on a good trajectory.”
Evans cited labor market uncertainties as also complicating the FOMC’s task of deciding when “substantial further progress” has been made, during a webinar Q&A session.
“I think with the labor force, with child care, with a number of these other types of issues, there is more uncertainty, and it does make me wonder…,” he said. “I do think that unemployment is going to be under 5% at the end of this year. I think it’s going to be 4 ½.”
“But I think a number of things have to break carefully, and given the more recent months of lower employment growth than I was expecting, there are still things to assess in terms of ‘substantial further progress’ that needs to be met for us to make adjustments in our monetary policy stance,” he added.
Pressed on when the Fed will start tapering, Evans said, “we’re just going to have to be monitoring the data.”
“We’re going to have to be looking at the employment improvements,” he continued. “I think we were disappointed a few months ago, but I think it’s started to turn up.”
He said labor force participation “is going to be very important.”
“I want to know we’re on track for unemployment (to fall to his projected 4 ½%) nationally by the end of this year,” Evans said. “So, I’m looking to see that we’re on track. We’re at 5.9%, so I would expect it to start moving down more substantially and not go sideways, because sideways is sort of a challenge.”
At the same time, “we’ve got to look at inflation …,” Evans said. “I have an amount of confidence that the high numbers we’re seeing right now will be transitory one-offs, and I think that as we go into 2022, we’ll see a more normal inflation environment.”
“But I could be wrong, and as we monitor that if inflation looks to be more persistent, looks to be more inconsistent with our objectives, then we have to stop and think that maybe we need to modify our stance, perhaps a little earlier than I think,” he went on.
“But if unemployment is at 4 ½% at the end of the year and things are progressing the way that I’m expecting, I would guess that some adjustment would be in order somewhere in that (late 2021) time frame probably, but it’s going to depend on the data,” he added.
Asked again how long it would take for the FOMC to have a clear enough picture to make a judgment, Evans replied that “it could come more quickly if we see substantial progress very quickly. if the pace picks up.”
“I do think this is going to be one of those things where we’re going to have to have an accumulation of more months,” he continued. “I think if the employment situation had not had that sort of little flattening before, we could have been on track a little bit earlier… I think it’s going to take more than a couple of months to sort this one out.
Evans concluded that “it’s probably going to take into the fall” before the FOMC is able or willing to announce impending tapering.
As for whether the FOMC should first reduce or eliminate MBS purchases, or reduce them disproportionately relative to Treasury purchases, Evans said “I don’t really have strong views,” but then proceeded to credit New York Fed President John Williams’s opinion Monday that a blend of MBS and Treasury purchases is valuable in providing financial support for the recovery.
Evans said Williams “made a very good point and others that all of these asset purchases are serving a purpose for providing accommodation.”
“It’s not narrowly directed,” he continued. “Although it is MBS and it seems like it is narrowly focused toward housing, it has much larger effects throughout markets and the way markets are functioning, and there is fungibility with different types of liquidity and assets.”
“And so, I think it would be challenging to sort of do something substantially different than just sort of what we did before, which was just to reduce the pace for each element as we’re going along,” he said, before adding that “we haven’t had enough of those discussions … and I look forward to more enlightenment.”