–Fed Established Expectations No Rate Hikes ‘For A Long Time”
–Fed, Tsy Have Flexibility To Deal Wtih Renewed Financial Stress if Needed
–Economy Holding Up; Expect Above Trend Growth Q4, 1st half
–Pandemic Doesn’t Necessarily Impede Output, Employment
By Steven K. Beckner
(MaceNews) – St. Louis Federal Reserve Bank President James Bullard Tuesday spoke hopefully about the economic outlook and said monetary policy is well-positioned to fuel continued growth, but said he would be willing to consider expanded asset purchases if necessary.
Bullard, talking to reporters following a Bank of Finland Monetary Policy Webinar, was not unduly upset about Treasury Secretary Steve Mnuchin’s recent decision not to renew some of the Fed’s emergency lending programs, saying they could be renewed if necessary and that the Fed and Treasury have ample “flexibility” to address renewed financial stresses should they emerge.
Some recent data have suggested the economy is slowing following an annualized 33.1% third quarter GDP growth pace. However, Bullard downplayed the indicators.
“The data hasn’t been as strong as it was,” he acknowledged, “but if look at ISM, it’s pretty strong yesterday.”
“So far, I think we’re holding up and estimates for fourth quarter GDP are for well above trend growth,” Bullard continued, adding that a slowdown from the torrid third quarter pace was to be expected.
“I think we’ll still get above trend growth in the fourth quarter and the first half of next year,” he went on, adding that while he is “concerned about virus risks,” his “base case is still that we will have above trend growth.”
Asked how the Fed would respond if the pandemic worsens further and additional fiscal stimulus is not forthcoming, Bullard replied, “We remain committed to using all available tools to support the economy.”
“We have a great policy right now,” he continued, noting that the Fed has “established expectations that we will remain at this level for a long time in the future.”
Echoing Chairman Jerome Powell, he said the Fed is “not even thinking about thinking about” raising rates.
What’s more, Bullard, not a voting member of the Fed’s policymaking Federal Open Market Committee this year, said the Fed is conducting an asset purchase program that’s very robust and continuing.” He added, “We could redouble our efforts there.”
“I don’t see any reasons to change it right now,” he added, noting that long-term interest rates are very low and likely to “remain low for the forseeable future” partially because of the Fed’s “exisitng programs.”
But Bullard said he “would certainly be willing to consider (more) actions in the future if the economy should turn down.”
But for now he expressed satisfaction with the Fed’s stance. “We’re In a great position here,” he said, noting that a Covid-19 vaccine is “ahead of schedule.. There is light at the end of the tunnel…” He observed that businesses have learned to cope with the virus and maintain production and employment to meet demand.
At its Nov. 4-5 meeting, the FOMC voted unanimously to keep the federal funds rate in a zero to 25 basis point target range and anticipated “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 percent and is on track to moderately exceed 2 percent for some time.” The FOMC also agreed to maintain asset purchases at “the current pace” of $120 billion per month.
More recently, Treasury Secretary Steve Mnuchin announced plans to extend for until March 31 several of the Fed’s emergency credit and liquidity programs, in which it has been acting as capital backstop, but said it will not extend the corporate cr5edit, municipal lending and Main Street lending programs beyond Dec. 31.
Asked about that decision, Bullard said the programs that are being allowed to expire “were not being widely used” and “had some criticism around them.”
What’s more, he said the programs “could be revived in the future” if the Treasury Secretary, whoeve that may turn out to be, decides they are needed.
Bullard said the mere “threat” of reintroducing special credit facilities “keeps markets strong.”
“I think overall, between the Treasury and the Fed, we have enough flexibility to deal with renewed financial stress should it occur,” he added.
Earlier, Bullard contended to Webinar participants that monetary policy can address increasing social inequality. He said nominal GDP targeting, employing counter-cyclical price-level movements. “constitutes “optimal monetary policy for the masses” in this environment.”
Such a policy “improves consumption allocations, alters the asset holding distribution and alters the income distribution by altering hours worked,” Bullard said.
He noted that in its new “framework review,” the FOMC talks about “how we can help everybody, not just rich people or Wall Street.” He added that the new monetary strategy, in opting for flexible inflation rate targeting, has “taken a step in this direction” of nominal GDP targeting.
Bullard defended his suggestion that the Fed set equality objectives when a former senior Fed staffer questioned the legitimacy of central banks doing so: “No matter what you do with monetary policy we’re going to get redistributive effects…So I don’t think we can really avoid the question.”
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Contact this reporter: steve@macenews.com.
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