–But Fed Vice Chairman Wants ‘Several Months’ of Labor Market Data
By Steven K. Beckner
(MaceNews) – Federal Reserve Vice Chairman Richard Clarida pointed toward a potential announcement of reduced asset purchases “later this year,” but said it will probably take “several months” to get a clear employment picture.
Clarida was upbeat in a webinar hosted by the Peterson Institute for International Economics, but emphasized that a lot of uncertainty remains in the outlook, as well as “downside risks” to employment to go with “upside risks” to inflation.
While opening the door to “tapering” of asset purchases, he said raising the federal funds rate from the current zero to 25 basis point target range is “not on the radar” of the Feds’ rate-setting Federal Open Market Committee.
He said the conditions for “liftoff” from the zero lower bound could be met by the end of next year, though.
At its meeting last week, the FOMC reaffirmed plans to keep buying $40 billion of agency mortgage backed securities and $80 billion per month of Treasury securities “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.” Its policy statement observed that since last December “the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings.”
Elaborating in his post-FOMC press conference, Chairman Jerome Powell said he and his colleagues “expect that the economy will continue to move toward our standard of ‘substantial further progress,’ In coming meetings the Committee will again assess the economy’s progress toward our goals, and the timing of any change in the pace of our asset purchases will depend on the incoming data.”
But Powell seemed to suggest that tapering is still a good ways off, saying, “We’re not at substantial further progress” and adding there is “ground to cover to get there.” He said, “We are some way away from having had substantial further progress toward our maximum employment goal” and said he wants to see more “strong job numbers.”
Clarida echoed those comments in prepared remarks: “Since (December), the economy has made progress toward these goals. At our meeting last week, the Committee reviewed some considerations around how our asset purchases might be adjusted, including their pace and composition, once economic conditions warrant a change.”
“Participants expect that the economy will continue to move toward our standard of ‘substantial further progress,”” he continued. “In coming meetings, the Committee will again assess the economy’s progress toward our goals. As we have said, we will provide advance notice before making any changes to our purchases.”
Clarida was more specific in response to questions after first laying down a bright baseline forecast of 7% year-over-year growth, 4.5% unemployment at year’s end and inflation going from 3% this year to 2.1% over the next two years.
If the economy remains on track to realize that forecast, Clarida said, “I can certainly see myself supporting announcing a reduction in the pace of our purchases later this year.”
However, Clarida qualified that comment and seemed to condition a tapering announcement on confirmation of further improvement in the labor market. He emphasized monetary policy these days is outcome-based, not outlook-based.
“I think we’re going to know about labor market over next several months than we do right now,” he said, adding that currently, “There are factors holding back labor supply,” including issues of child care, virus concerns and unemployment benefits.
Looking ahead, Clarida said, “I and many of my colleagues.. (think) we’re going to learn a lot more about the labor market. My baseline view is that we will begin to see in the Fall some pretty healthy increases in labor supply and employment gains.”
However, “there are risks to that outlook…,” he went on. There are “downside risks” and, “We have to look carefully to see if that plays out.”
It was in that context that Clarida said he could “see himself” supporting an announcement of “a moderation of the rate of purchases later this year.”
Clarida also stressed the importance of achieving “maximum employment that is broad based and inclusive” under the FOMC’s new policy framework. “We recognize how important it is to get to a low unemployment rate consistent with price stability and to keep it there.”
While sending conditional tapering signals for “later this year,” Clarida made clear liftoff is still in the distance.
As for the funds rate, after forecasting 7% year-over-year GDP growth, 4.5% unemployment at year’s end and inflation going from 3% this year to 2.1% over the next two years, Clarida said
“if the outlook for inflation and outlook for unemployment I summarized earlier turn out to be the actual outcomes for inflation and unemployment realized over the forecast horizon, then I believe that these three necessary conditions for raising the target range for the federal funds rate will have been met by year-end 2022,” he said.
“Given this outlook and so long as inflation expectations remain well anchored at the 2% longer-run goal – which, based on the Fed staff’s common inflation expectations (CIE) index, I judge at present to be the case and which I project will remain true over the forecast horizon – commencing policy normalization in 2023 would, under these conditions, be entirely consistent with our new flexible average inflation targeting framework,” he added.
Raising the funds rate and tapering are “completely separate decisions,” Clarida said, “There is a different metric for liftoff than the metric for reducing the pace of asset purchases.”
“We’re not thinking about hiking rates,” he said. “It’s not on the radar screen.”
Elaborating on inflation, Clarida made two points: “First, if, as projected, core PCE inflation this year does come in at, or certainly above, 3%, I will consider that much more than a ‘moderate’ overshoot of our 2% longer-run inflation objective.”
“Second, as always, there are risks to any outlook, and I believe that the risks to my outlook for inflation are to the upside,” he said.
Clarida emphasized the high degree of uncertainty. ““The outlook I have described … is, of course, only one of many possible paths that the economy may take.”
“(T)he recovery to date has been surprising, and it is plausible—indeed, probable – that more surprises are in store,” he continued. “The economic outlook is always uncertain, both because new shocks can arrive – which, by their nature, cannot be foreseen – and because our knowledge of the workings of the economy is imperfect.”
“Additionally, the recovery and expansion following the pandemic are unlike any we have ever seen, and it will serve us well to remain humble in predicting the future,” he went on. “In light of these uncertainties, the Committee is rightly basing its judgments on outcomes, not just the outlook.”
“Looking ahead, our policy decisions will continue to depend on the data in hand at the time, along with their implications for the outlook and associated risks,” he added.
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Contact this reporter: steve@macenews.com.
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