— Sharp Upward Revisions of Funds Rate Projections Reinforces Message
By Steven K. Beckner
(MaceNews) – Federal Reserve Chairman Jerome Powell gave the first indication he is ready to contemplate lessening monetary accommodation, even as he and his fellow policymakers left in place the most aggressively easy monetary stance in its history Wednesday.
Though not specific as to timing, the Fed chief gave a clear signal he wants a reduction in the pace of asset purchases to be on the table for discussion at upcoming meetings of the Fed’s policy making Federal Open Market Committee.
Powell’s message was reinforced by the revised economic forecasts and interest rate projections compiled by FOMC participants. Although the FOMC voted unanimously to leave the federal funds rate near zero, there was a significant shift in participants’ funds rate expectations, with enough officials now seeing the need for a 2022 rate hike to move the median projection for that year from 0.1% to 0.6%.
The FOMC also increased two key administered rates – the rate of interest paid on excess reserves and the rate on overnight reverse repurchase agreements – to help keep the funds rate within the zero to 25 basis points in face of downward money market pressures.
For now, the Fed’s balance sheet policy remains unchanged, the FOMC having voted to continue buying $120 billion of bonds per month “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”
But Powell left no doubt, speaking to reporters after the FOMC meeting, that the days of buying $80 billion of Treasuries and $40 billion of agency mortgage backed securities every month are numbered.
He said and his colleagues “had a discussion on the progress made toward our goals since the Committee adopted its 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 went on. “In coming meetings, the Committee will continue to assess the economy’s progress toward our goals.”
Powell promised to “provide advance notice before announcing any decision to make changes to our purchases.”
In the weeks leading up to the meeting, an assortment of Fed officials mused about the need to start considering reduced bond buying. At first, it was non-voters, such as Dallas Federal Reserve Bank President Robert Kaplan and Philadelphia Fed President Patrick Harker making the comments. But as the meeting approached, Vice Chairman Richard Clarida and Vice Chairman for Supervision Randal Quarles also suggested the time to discuss tapering was growing closer.
So Fed watchers have been anxiously waiting to see whether or not Powell would echo those views, and in fact he did.
Elaborating in response to questions, Powell was even more clear that the FOMC is moving toward serious consideration of tapering, saying, “We will begin meeting by meeting to assess that progress” and do what is necessary to “to clarify our thinking” as to “when and how to adjust the pace and composition of asset purchases.”
Referring to FOMC participants’ upgraded economic forecasts, Powell said officials have become “more comfortable” and “more confident” that the economy is recovering from the pandemic and is doing so “somewhat sooner than previously anticipated.”
Powell said he could give “no sense of timing,” but added, “We’re making progress,” although the recovery remains “incomplete.”
Powell declared that this meeting marks the end of speculation about when the Fed would start “talking about talking about” tapering.
“It’s time to retire that term,” he said. “It’s served its purpose.”
Powell said the FOMC expects to “see things in coming months that will inform our thinking” about tapering. He was optimistic, saying he expects “a very strong labor market.”
Asked how the Fed will signal that tapering is imminent, he said, the “intention” is to be “orderly, methodical and transparent.”
“We see real value in communicating well in advance what our thinking is,” he said. “We will try to be clear” and “will give advance notice before decision to taper.”
While wanting to avoid the kind of “taper tantrum” that occurred in 2013, Powell said that once the FOMC has determined that “substantial further progress” has been made, it will announce that.
The FOMC also reaffirmed its intention 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.”
But the time horizon for staying in that range has been shortened considerably. In their revised Summary of Economic Projections, the 18 FOMC participants anticipated it will be “appropriate” to keep the funds rate near zero just until 2023, rather than until 2024 as in the March SEP. Only five of the participants saw the funds rate staying in the zero to 25 basis point target range through 2023, compared to 11 of 18 in the March SEP and 12 of 17 in the December SEP.
The “dot plot” shows seven participants now projecting an initial rate hike in 2022, compared to four in March. Two saw more than one rate hike that year.
The projected continuation of ultra-low short-interest rates, albeit over a shorter time frame, came despite increased optimism about the economy and higher inflation forecasts. Participants lifted their median forecast of real GDP growth from 6.5% to 7.0%, receding to a still-rapid 3.3% next year. They continued to forecast a 4.5% unemployment rate for this year, before falling to 3.8% next year – a tenth lower than forecast in March.
They sharply increased their inflation forecast from 2.4% to 3.4% overall and from 2.2% to 3.0% for the core inflation rate – both well above the Fed’s 2% average target rate. They forecast inflation will cool to 2.1% next year and 2.2% in 2023.
As their meeting got underway Tuesday, Fed policymakers got some disappointing May economic data were released. Retail sales dipped 1.3% after rising 0.9% in April. Constrained by supply bottlenecks, industrial production rose 0.8% following a downwardly revised 0.1% m/m April increase.
But the larger trend in recent months has been steady recovery from the pandemic. The FOMC statement acknowledges the improvement.
No longer does it say that “the ongoing public health crisis continues to weigh on the economy…”
The latest statement says, “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.
“Progress on vaccinations has reduced the spread of COVID-19 in the United States,” it says. “Amid this progress and strong policy support, indicators of economic activity and employment have strengthened. The sectors most adversely affected by the pandemic remain weak but have shown improvement.”
Employment gains have not been as great as expected in April and May, but a surge in both job openings and job quitting suggests there is more of a labor supply than a labor demand problem. The Fed’s beige book survey found that employers are having trouble filling job openings. The FOMC acknowledged that employment “has strengthened.”
Meanwhile, inflation surged last month The Consumer Price Index rose 5% year-over-year, biggest increase in 13 years, while the “core” CPI rose 3.8%. Inflation expectations, as measured by the University of Michigan, jumped 4.6%.
The FOMC conceded inflation has risen, but again attributes it to “largely … transitory factors.”
Asked about inflation, Powell reiterated he thinks the upsurge in inflation will likely prove “temporary,” but he said the FOMC is prepared to “adjust” monetary policy if inflation turns out to be “materially and persistently” higher than expected.
The Fed chief said “the statement language is evolving, and I would expect it to continue to evolve,” although he added that Fed watchers should “expect us to drag our feet a little bit.”
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Contact this reporter: steve@macenews.com.
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