By Steve Beckner
–Vows Clear Communication Well Ahead of Any Tapering of QE
–Downplays Concerns About Inflation, Asset Bubbles
(MaceNews) – Federal Reserve Chairman Jerome Powell showed some impatience with talk of “exiting” from the Fed’s exceptionally easy monetary policies Wednesday and vowed to continue providing support to the economic recovery “until the job is done.”
Mindful of the bond market’s 2013 “taper tantrum,” Powell pledged to communicate clearly ahead of any impending change in the asset purchase program, but stressed that it is “premature” to talk about reducing purchases.
Powell, talking to reporters after the Fed’s policy making Federal Open Market Committee held its first two-day meeting of the year, downplayed concerns about the inflationary consequences of unprecedentedly expansionary monetary and fiscal policies and said he is more worried about inflation being too low at a time when the economy remains “far from full recovery.”
He again stressed the economic outlook and in turn monetary policy depend heavily on the extent to which anti-Covid vaccines and public health measures contain the pandemic and permit a return to normal activities. Widening vaccine distribution has been accompanied by mixed reports on Covid cases and concerns about a new virus strain, causing continued uncertainty.
The Fed chief also lent his support once more to continued fiscal stimulus to supplement the Fed’s ultra-loose credit stance, though he avoided being prescriptive about it. The Biden administration is working with a Democratic Congress on another $1.9 trillion in deficit spending – just weeks after enactment of a $935 billion relief package.
Earlier, the FOMC announced few meaningful changes in its policy statement, leaving the federal funds rate in a zero to 25 basis point target range and reaffirming its intention to continue buying $120 billion of bonds per month.
Echoing its Dec. 16 statement, the FOMC said it wants to “achieve inflation moderately above 2% for some time so that inflation averages 2% over time and longer-term inflation expectations remain well anchored at 2%.” It added that it “expects 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% and is on track to moderately exceed 2% for some time.”
The FOMC also reiterated forward guidance on asset purchases, inaugurated in December, saying it “will continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage backed securities by at least $40 billion per month until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”
FOMC participants did not produce a revised set of economic and rate projections at this meeting, but the Committee modified its characterization of the economy somewhat in its statement to reflect a recent slowing of growth: “The pace of the recovery in economic activity and employment has moderated in recent months, with weakness concentrated in the sectors most adversely affected by the pandemic. Weaker demand and earlier declines in oil prices have been holding down consumer price inflation.”
(It previously said the economy and employment had “continued to recover.”)
The FOMC repeated its caveat that “the path of the economy will depend significantly on the course of the virus. The ongoing public health crisis will continue to weigh on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook.” Previously, the statement appended “over the medium term” to the end of that sentence.
The FOMC reaffirmed the Statement of Longer-Run Goals and Monetary Policy Strategy as revised last August, under which the Fed aimed for inflation “moderately above 2% for some time” to achieve “average” 2% inflation and undertook to “mitigate shortfalls” of employment from maximum levels .
Much of the market’s focus has been on when the Fed will begin scaling back, or otherwise adjusting, asset purchases. Cessation, or at least tapering, of bond buying is a prerequisite for lifting off from the funds rate zero lower bound, according to minutes of prior FOMC meetings.
Powell was vague about timing, but gave no hint that any changes are likely in coming months, even though some of his colleagues have spoken of possible “recalibration” in the spring.
Asked when the Fed might begin to taper asset purchases, he replied, “That’s just premature.”
“We just created guidance” in December, he noted. “We want to see sustainable further progress. It’s just too early to be talking about dates.”
Instead, “We should focus on progress,” Powell added, vowing to be “very transparent” ahead of any slowing of the pace of bond buying.
“When we get to that point we’ll communicate clearly so no one is surprised,” he promised. “We will do that well in advance of what will be a very gradual taper.”
But Powell was not done with a subject he clearly considers tiresome: “The whole focus on exit is premature… We’re focused on finishing the job we’re doing.”
Noting more than 9 million Americans remain jobless due to Covid-related shutdowns, he said, “it’s essential we get them back to work as soon as possible… . That’s our primary focus … . It’s too soon to be focused on that (exit) . Our focus is on giving the economy the support.”
If anything, Powell indicated, the Fed stands ready to augment its monetary stimulus.
“Clearly there is more we can do,” he said, adding that on asset purchases, “We could strengthen our guidance if we thought that was appropriate.”
“What’s holding back the economy is not monetary policy, it’s the pandemic,” he continued, but added, “We certainly have things we can do, but we think we’re in the right place.”
“If progress were to slow we could increase accommodation through a lower expected path of the funds rate and a higher than expected path of the balance sheet,” he said.
“We will remain highly accommodative” until the Fed has achieved its maximum employment and redefined inflation goals, he asserted.
While saying the “base case” is for a “strong” second-half recovery, Powell said that for now, “We are a long way from full recovery… and the path ahead is still pretty uncertain.”
Powell called fiscal stimulus “essential,” but declined to get into specifics about what more might be needed.
Asked whether the combination of zero interest rates, aggressive quantitative easing and deficit spending could pose an inflationary risk, Powell allowed for that possibility, but said the Fed “has the tools” to counter that. For now and for the foreseeable future, the risks are tilted very much in the opposite direction as far as he’s concerned.
“The inflation dynamics in the United States have consisted of a flat Phillips Curve, lack of persistence for some time…,” he said. “That may evolve over time but significant time … .They don’t change at a rapid rate … . I don’t believe they will.”
Powell added he is “much more worried about falling short of full recovery and people losing careers and lives… and the damage that will do to the U.S. economy.”
“I’m more concerned about that than about the possibility, which exists, of higher inflation. … We frankly welcome higher inflation … . The type of inflation I grew up with seems far away.”
Powell also emphasized the need to keep inflation expectations anchored at at least 2%.
Powell largely downplayed risks to financial stability. He said the Fed is constantly monitoring all segments of financial markets but said “financial vulnerabilities overall are moderate.”
Should financial imbalances emerge, he said the Fed would lean on macro-prudential, not monetary policy.
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.