– But Says Fed Can Afford To Be ‘Patient’ About Firming Monetary Policy
By Steven K. Beckner
(MaceNews) – The Federal Reserve is getting closer to a time when it will need to consider scaling back its asset purchases, now that it has gotten “sufficient” evidence of rising inflation, Fed Vice Chairman for Supervision Randal Quarles said Wednesday.
Quarles also suggested the Fed will soon need to provide clearer communication on what constitutes “substantial further progress” toward the Fed’s employment and inflation goals – the now vague threshold the Fed’s policy-making Federal Open Market Committee has laid out for when it will “taper” bond buying.
At the same time, Quarles said the FOMC can still afford to be “patient” about firming monetary policy and allow employment conditions to continue to improve, given that higher inflation is likely to prove “transitory.” He spoke at a virtual event hosted by the Brookings Institution’s Hutchins Center on Fiscal and Monetary Policy.
“If my expectations about economic growth, employment, and inflation over the coming months are borne out, however, and especially if they come in stronger than I expect, then … it will become important for the FOMC to begin discussing our plans to adjust the pace of asset purchases at upcoming meetings,” he said in prepared remarks.
“In particular, we may need additional public communications about the conditions that constitute substantial further progress since December toward our broad and inclusive definition of maximum employment …,” he added.
Quarles gave no sense of urgency to begin talking about tapering, however.
Noting that “the unemployment rate has decreased only 0.6 percentage points to 6.1%, and the labor force participation rate is still nearly the same as it was at the time of the December meeting,” he said, “we need to remain patient in the face of what seem to be transitory shocks to prices and wages so long as inflation expectations continue to fluctuate around levels that are consistent with our longer-run inflation goal.”
Quarles called it “a question of risk management.” He said, “the Fed has the tools to address inflation that runs too high, while it is more difficult to raise inflation that falls below target. If we’re wrong, we know how to bring inflation down.”
“But if our assessment is correct that inflation is temporary, it would be unwise for us to take actions that might slow the recovery prematurely by trying to stay ahead of inflation, when our best estimate is that we are not far behind,” he added.
Elaborating in response to questions, Quarles said he’s not ready to be specific about the timing or conditions for tapering: “I think I said it would soon be time to start talking about what constitutes ‘substantial further progress.’ So that would suggest it would be premature for me to put down some markers yet.”
Quarles went on to hint there could still be considerable delay before serious consideration of tapering begins.
“Obviously there’s more to go,” he said. “We’re still significantly short” in achieving “maximum employment. Citing the 6.1% unemployment rate and the large number of underemployed people, he said, “By any of those measures, we’re far enough away from whenever we want to lay down markers ….. We have plenty of time….”
Asked about a tradeoff between higher than expected inflation and meeting the maximum employment objective, Quarles said, “We haven’t begun sort of quantifying where we would put down these thresholds.”
Explaining his approach, Quarles said “it’s not that it’s a tradeoff, but rather our experience of the last decade, as well as our expectation about what’s driving current inflation .…”
Looking at it that way, he said, “you can in fact be patient and allow unemployment to fall, allow employment to rise to fairly high levels…without engendering a significant cost of inflation.”
Quarles doubted the economy has changed that much from pre-Covid times when inflation did not accelerate in response to very low unemployment and said it is to be expected that inflation would rise temporarily now in wake of a shutdown.
Nevertheless, he said the inflation threshold for reducing asset purchases is lower than for raising the federal funds rate.
“I do think that, as we’ve indicated, one (tapering) will happen before the other (liftoff) and that of the thresholds that we set down, I think what we’re seeing currently is sufficient inflation to satisfy the inflation condition for the asset purchases (tapering).”
“I don’t think that indicates that I would expect that inflation will be durably and worryingly above our 2% threshold,” he went on, “simply that it has reached a level that satisfies that condition for that step of the evolution of our policy.”
Irrespective of when the Fed might start tapering bond purchases, he said the FOMC will be talking about whether to continue buying agency mortgage backed securities, given the heated condition of the housing market. MBS purchases are “ripe” for reconsideration, he said.
Quarles has consistently voted with other Fed Board members to support the most aggressively lax monetary policy in the central bank’s history. At its late April meeting, the FOMC reaffirmed its intent 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 percent for some time.” FOMC participants projected no increase in the funds rate until 2024 in their last quarterly Summary of Economic Projections, released in March.
In addition to keeping short-term interest rates near zero, the FOMC also reiterated it will keep buying $120 billion of bonds per month to hold down long-term rates “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”
When the FOMC meets again June 15-16, it will publish a revised quarterly set of economic forecasts and rate projections.
Amid mounting speculation about when the FOMC will start to scale back asset purchases – or at least start considering “tapering” – some non-voting Federal Reserve Bank presidents have spoken recently of the need to discuss doing so before long. “Sooner rather than later,” Philadelphia Fed President Patrick Harker.
But voters have largely refrained from talking about the timing of tapering. San Francisco Fed President Mary Daly explicitly deferred to chairman Jerome Powell. “I don’t want to front run the committee discussions by coming down on any particular thing because we’re not in a place where that’s been decided. You would hear that first from the chair and he has signaled that we’re not ready to start talking about talking about these types of things.”
Fed Vice Chairman Richard Clarida took a tentative step toward tapering Tuesday, when he said, “There will come a time in upcoming meetings where we’ll be at the point where we can begin to discuss scaling back the pace of asset purchases.”
Now, Quarles seems to have taken a further step toward starting the tapering “conversation.”
. Asian mar