–Little Support For Faster Reduction in MBS Purchases.
By Steven K. Beckner
(MaceNews) – Federal Reserve Chairman Jerome Powell continued Wednesday to set the stage for eventual reductions in the Fed’s large-scale asset purchases, and gave no clear signal as to when “tapering” could commence.
For the time being, the policy making Federal Open Market Committee reaffirmed an intention to keep buying $40 billlion of agency mortgage backed securities and $80 billion per month Treasuries “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”
However, in a significant departure, the FOMC policy statement said that since last December “the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings.”
Although Powell was vague about when and how the Fed might change its asset purchase program, his latest comments do represent progress toward tapering. Whereas in June, he said the FOMC had finally started “talking about talking about” tapering, he told reporters after the FOMC meeting that he and his fellow policymakers had begun discussing tapering in earnest.
“The Committee continued to discuss the progress made toward our goals since the Committee adopted its asset purchase guidance last December,” he said. “We also 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, and the timing of any change in the pace of our asset purchases will depend on the incoming data.”
As he has done before, Powell pledged, “We will provide advance notice before making any changes to our purchases.”
Powell said there is very little support for starting to reduce MBS purchases before it tapers Treasury purchases, although he said there is some support for cutting MBS purchases faster once the taper begins.
The FOMC also left the federal funds rate in a zero-to-25-basis-point target range and reiterated 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.”
As in the June 16 policy statement, the FOMC said it “would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”
By contrast, in his July 14-15 testimony on the Fed’s semi-annual Monetary Policy Report to Congress, Powell sounded somewhat more hawkish, saying the FOMC would be prepared to adjust if it “saw signs that the path of inflation or longer-term inflation expectations were moving materially and persistently beyond levels consistent with our goal.”
The Fed chief repeated that language in his press conference.
Powell said several times that the FOMC would “use its tools” if inflation were to overshoot “persistently and materially” and if inflation expectations were to rise in a worrisome way, but he said he sees no sign of worrisome inflation expectations at this time. And he said the FOMC is not even thinking about “liftoff” for the funds from the zero lower bound at this time.
Despite repeated prompting, Powell declined to be more specific about when the FOMC might arrive at a conclusion that there has been “substantial further progress” and thus, be able to announce a tapering decision. He indicated that he and his colleagues are in no rush.
In his testimony before the House Financial Services Committee and Senate Banking Committee July 14-15, Powell said “reaching the standard of ‘substantial further progress’ is still a ways off.” And he did not really diverge from that viewpoint following the FOMC meeting.
“We’re not at substantial further progress,” he said, adding there is “ground to cover to get there.” In particular, he said “We are some way away from having had substantial further progress toward our maximum employment goal,” and that he wants to see more “strong job numbers.”
And while inflation is running much more than merely “moderately” above 2%, Powell said he expects inflation to come back down toward 2%.
Powell said the FOMC would continue to assess progress “meeting by meeting” and try to achieve greater clarity at future meetings.
Addressing a question about the timing of tapering, Powell said, “If I said we’re looking at a couple more months of data, I’m not suggesting anything about a particular time at which we might taper. We really have not made that decision.”
“All I’m saying is we’re not at substantial further progress,” he continued. “There’s a range of views on what timing will be appropriate. Those views ultimately track back to people’s views about the economy and what will happen as we make progress towards our goal. That’s really what it is.”
“We’re going to continue to try to provide clarity as appropriate, on time and pace and composition,” Powell went on. “Today I’ve given you what I can give you because this was the first really I would say deep dive on the issues of time and pace and composition and it was a good meeting. No decisions were made. I’m just not in a position to give you much guidance, really any guidance on the actual timing.”
“But I will say, we’re making progress,” Powell added. “We expect further progress. And we expect that if things go well then we will reach that goal. When we reach it and the committee is comfortable that we have reached it, then we’ll taper at that point.”
Speculation has grown that the FOMC might eventually reduce MBS purchases quicker or more disproportionately than Treasury purchases, but Powell gave no such indication when asked about that.
“I think the Treasury and MBS purchases affect financial conditions in very similar ways,” Powell said. “There may be modest differences in terms of contribution to housing prices, but it’s not something that’s big.”
“So where I think we are is there really is little support for the idea of tapering MBS earlier than Treasuries,” he continued. “I think we’ll taper them at the same time; it seems likely based on where people are now.”
Powell added that “the idea of reducing MBS purchases at a somewhat faster pace than treasuries does have some attraction for some people. Others not so much. And I think it’s something we’ll be continuing to discuss.”
In the weeks leading up to the meeting, a number of Fed officials have recently said they don’t expect to have sufficient evidence of “substantial further progress” until sometime in the fall. Given the Fed’s commitment to giving notice of tapering “well in advance,” that seems to suggest that actual tapering might not occur until late this year or early next.
Since the FOMC last met, news on inflation has worsened, with the Consumer Price Index rising 5.4% year over year in June. Employment and other economic data have largely shown continued strong recovery from the pandemic.
But in its characterization of the economy, the FOMC made no great departures. It again said higher inflation ”largely reflect(ed) transitory factors.”
Virus news has deteriorated in recent weeks, with heightened alarms about the “Delta variant” of Covid prompting renewed mask mandates in some jurisdictions. But the FOMC statement did not accentuate risks from the virus, although it did use different language. The FOMC now says, “With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have shown improvement but have not fully recovered.”
The new statement adds, “The path of the economy continues to depend on the course of the virus. Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain.”
By contrast, in June, the FOMC said, “progress on vaccinations has reduced the spread of COVIDI-19 in the United States. Amid this progress and strong policy support, indicators of economic activity and employment have strengthened.” And it went on to say, “The path of the economy will depend significantly on the course of the virus. Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain.”
Financial conditions have changed considerably since the June FOMC meeting. The 10-year note yield stood at 1.238% Tuesday and traded as low as 1.128% last week. By contrast, on June 16, it was high as 1.5940%. Stocks, meanwhile, have been setting records.
Commenting on the behavior of yields, Powell cited a number of factors, including growth concerns caused by the Delta variant and changes in inflation compensation, but said, “I don’t see in any of that that there is anything that really challenges the credibility of our framework.”
Separately, the FOMC announced the establishment of two standing repurchase agreement (repo) facilities – a domestic standing repo facility (SRF) and a repo facility for foreign and international monetary authorities (FIMA repo facility).
The Fed said “these facilities will serve as backstops in money markets to support the effective implementation of monetary policy and smooth market functioning.”
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Contact this reporter: steve@macenews.com.
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