By Steven K. Beckner
- Downplays Inflation Concerns In Pursuit of Maximum Employment
- MBS Purchases Will Be On FOMC Table, But Part of Overall QE Effort
(MaceNews) – Federal Reserve Chairman Jerome Powell continued to point toward an eventual reduction in the pace of Fed asset purchases in congressional testimony Wednesday, but gave no sense of when so-called “tapering” will actually commence.
Powell seemed to imply there is no rush to lessen the amount of accommodation the Fed is providing through asset purchases in the first of two days of testimony on the Fed’s semiannual Monetary Policy Report to Congress. He emphasized the Fed still has “a long way to go” to meet its “maximum employment” objective and repeatedly told the House Financial Services Committee he is convinced recent upsurges in inflation will prove “transitory.”
Powell left open the possibility that the Fed’s policymaking Federal Open Market Committee could reduce the proportion of mortgage backed securities purchased relative to Treasury securities, but gave no indication he is leaning in that direction. MBS purchases should be seen as part of an overall effort to support the economy by easing financial conditions, in his view.
At its June 15-16 meeting the FOMC reaffirmed plans to keep buying $120 billion of bonds per month – $80 billion of Treasury and $40 billion of agency mortgage backed securities – “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”
But Powell told the representatives he and his colleagues had “discussed the economy’s progress toward our goals since we adopted our asset purchase guidance last December.”
“While reaching the standard of ‘substantial further progress’ is still a ways off, participants expect that progress will continue,” he said in prepared testimony. “We will continue these discussions in coming meetings.” He reiterated a pledge to “provide advance notice before announcing any decision to make changes to our purchases.”
Powell made clear the FOMC will return to a discussion of tapering at its July 27-28 meeting.
But he refused to be any more specific about what the FOMC means by “substantial further progress” when asked about when he expected that goal to be met and when the Fed might start tapering.
“We didn’t try to write down a particular set of numbers that would capture that (substantial further progress),” he said. “It would have been complicated and not particularly worthwhile. So we said ‘substantial further progress,’ which is similar to what we did during the recovery from the global financial crisis years ago. We had a similar kind of set of words for when we would taper asset purchases.”
“The thing is it’s very difficult to be precise about it, because with maximum employment there are no three or four or five or six metrics that you could point to,” he continued. “It really is a very broad range of things, including wages, unemployment, levels of employment, participation, all those things. So we just said ‘substantial further progress’”
“And we also said that we would provide advance notice…well in advance of actually tapering, understanding that this is somewhat of a discretionary test, and that we don’t want to surprise markets or the public,” Powell went on. “So we will provide lots of notice as we go forward on that.”
Powell noted, “We have another FOMC meeting in a couple of weeks from today, and we will have another round of discussions on this very topic.”
“If we continue to make progress toward our goals you will see us beginning to reduce those purchases,” he said.
Powell gave no indication he’s inclined to disproportionately reduce MBS purchases despite the booming housing market that was cited by a number of congressmen. In response to a number of questions, he suggested that buying a mix of Treasuries and MBS are needed and are aimed at supporting accommodative financial conditions and economic activity generally – not simply to lower mortgage rates to boost housing.
Purchases of MBS and Treasuries, as well as keeping the federal funds rate near zero, “all go into producing a low interest rate environment and go into mortgage rates,” he said.
“Mortgage backed security purchases really work a lot like Treasury purchases,” he continued. “They aren’t especially important in what’s happening with housing prices.”
“They are nevertheless clearly a factor among factors,” he went on. “So this is one of the things we’ll be considering as we go through this process of evaluating when to taper and in what form – what will be the composition of asset purchases going forward. Those are all issues that we will be discussing at this next meeting in a couple of weeks.”
Powell continued to be pressed on why the Fed needs to keep buying MBS, given the low level of mortgage rates and the health of the housing market, but he was no more forthcoming.
MBS purchases are “not intended to provide support for any industry, including the housing industry,” he said.
MBS purchases “do support low mortgage rates,” Powell went on, “but it’s not that we’re looking at the housing market. We want to support overall demand.”
“Really we look at the whole things we’re buying – Treasury and MBS,” the Fed chief said. “Both have the same kind of effects on the economy. MBS has more effect on housing; that’s not the reason we were buying them in the first place. We’re in the process of looking at tapering those purchases.”
Powell said “the timing and the composition of the taper are the two main things along with whether we’re meeting our goal of substantial further progress … . That will be in the conversation for sure.”
The FOMC also reiterated it expects to keep the federal funds rate in a zero to 25 basis point target range “until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.” Reflecting heightened inflation concerns, FOMC participants projected a median funds rate of 0.6% at the end of 2022, implying two 25 basis point rate hikes by the end of next year. In their previous quarterly “dot plot” In March, FOMC participants had seen no rate hike until 2024.
Probed on what the FOMC means by “some time” for 2%-plus inflation, Powell replied, “the answer is: it depends … . Right now inflation not moderately above, it’s well above 2%, nothing like moderately. So the question will be, and this will be a question for the Committee, where does this leave us in six months of so, when inflation as we expect does move down? How will that part of the (forward) guidance work? And it will depend on the path of the economy; it really will … .We’re not going to address that right now.”
Inflation cannot be looked at in isolation when deciding when to normalize monetary policy, he suggested.
Even after labor supply conditions clear up, “We will still be short of maximum employment, and at that time support for demand will be appropriate,” he said. “So that’s why we wouldn’t see that it’s time to raise interest rates now, because we think it will take time.”
Prior to his testimony, the Labor Department released two worrisome June inflation reports. Its Consumer Price Index leaped 0.9% in June and 5.4% from a year ago – biggest increase since 2008. The core CPI was up 4.5%, steepest since 1991. The Producer Price Index for finished goods rose even faster last month – jumping 1.0% or 7.3% from a year earlier.
But Powell continued to downplay inflation pressures, saying, “inflation has increased notably and will likely remain elevated in coming months before moderating.”
“Inflation is being temporarily boosted by base effects, as the sharp pandemic-related price declines from last spring drop out of the 12-month calculation,” ” he testified. “In addition, strong demand in sectors where production bottlenecks or other supply constraints have limited production has led to especially rapid price increases for some goods and services, which should partially reverse as the effects of the bottlenecks unwind. Prices for services that were hard hit by the pandemic have also jumped in recent months as demand for these services has surged with the reopening of the economy.”
After emphasizing the importance of “well-anchored” inflation expectations to avoid either “unusually low or high inflation,” Powell noted expectations “have moved up from their pandemic lows,” but remain “in a range that is broadly consistent with the FOMC’s longer-run inflation goal.”
Powell said the FOMC “would be prepared to adjust the stance of monetary policy as appropriate if we saw signs that the path of inflation or longer-term inflation expectations were moving materially and persistently beyond levels consistent with our goal.”
His comments did not prevent the Fed chief from being peppered with questions about inflation. He responded by repeatedly citing “transitory” influences on prices and downplaying inflation fears.
Asked about rising inflation expectations, Powell replied, “We don’t see problems on that front.”
Powell conceded, “People are very concerned about inflation. We hear that loud and clear.”
While providing reassurance that inflation will come back down, Powell several times promised that if inflation and inflation expectations were to move up in a way that was “troubling,” which he defined as rising “materially and persistently,” the Fed “would react to that.”
Powell said “there is nothing in our guidance or framework that would prevent us from doing the right thing at the right time.”
He said, “People need to have faith” that the Fed would “use its tools” to counter persistently high inflation, and he insisted that the Fed would not hesitate to raise rates out of fear that it would drive up the cost of financing record federal budget deficits.
For now, he said “it would be a mistake to act prematurely.”
On the employment side of the Fed’s “dual mandate,” Powell welcomed improvements, but continually said more is needed: “Conditions in the labor market have continued to improve, but there is still a long way to go.”
“Labor demand appears to be very strong; job openings are at a record high, hiring is robust, and many workers are leaving their current jobs to search for better ones. Indeed, employers added 1.7 million workers from April through June,” he observed.
“However,” he added, “the unemployment rate remained elevated in June at 5.9%, and this figure understates the shortfall in employment, particularly as participation in the labor market has not moved up from the low rates that have prevailed for most of the past year.”
—
Contact this reporter: steve@macenews.com.
Content may appear first or exclusively on the Mace News premium service. For real-time delivery contact tony@macenews.com. Twitter headlines @macenewsmacro.