By Steven K. Beckner
(MaceNews) – New York Federal Reserve Bank President John Williams was vague Monday about when he thinks the Fed should start scaling back its asset purchases, but suggested he is no hurry.
Williams said he needs to see a lot more data on both employment and inflation before coming to a conclusion that there has been “substantial further progress” toward meeting the goals set last December by the Fed’s policymaking Federal Open Market Committee.
Williams, the FOMC vice chair, said he and his colleagues will be looking at both the timing of “tapering” and the composition of asset purchases at upcoming meetings, but seemed to indicate a preference for continued buying of both Treasury securities and agency mortgage-backed securities as he spoke to reporters following a webinar on inflation targeting hosted by the Bank of Israel and the Center for Economic Policy Research.
The Fed is currently buying $80 billion of Treasuries and $40 billion of MBS per month, a policy reaffirmed at the June 15-16 FOMC meeting.
Williams’ comments essentially served to reaffirm Fed Chair Jerome Powell’s signal that, when the FOMC meets again at the end of July, Fed policymakers will be starting to consider changes to the asset purchase program. After the June FOMC meeting, Powell described it as “the talking about talking about meeting.”
Powell said then that FOMC participants “expect continued progress ahead toward that objective,” and “assuming that is the case, it will be appropriate to consider announcing a plan for reducing our asset purchases at a future meeting. So, at coming meetings, the Committee will continue to assess the economy’s progress toward our goals, and we’ll give advance notice before announcing any decision.”
While not contradicting the chair, Williams seemed to take a cautious or deliberate approach to arriving at a decision on tapering. And he said monetary normalization, involving first tapering and then “liftoff” of the federal funds rate from near zero” is “way off in the future for me.”
Williams, who emphasized that monetary policy is “outcome-” not calendar-based, repeatedly stressed the need to closely watch the data on both the employment and inflation side before making a decision about asset purchases.
“I’m watching the data carefully across a wide variety of indicators,” he said, adding that the FOMC has “set a very clear marker…. we want substantial further progress relative to the end of last year. That’s where I’m focused.”
With the economy still going through both demand and supply shocks related to the Covid pandemic, Williams said “it’s really important for us to think about” the data in deciding “what’s the appropriate timing for reducing purchases of assets.”
“We’re also thinking about not only timing but also composition,” he added.
Minutes of the June meeting showed that some Fed officials favor prioritizing reduction of MBS purchases, given the strength of the housing market, but Williams said, “the lesson of the past decade is that asset purchases on both MBS and long-term Treasuries do provide monetary accommodation to support economic growth and (meet) our employment and inflation objectives.”
Williams acknowledged that MBS purchases “do have some extra effect on mortgages,” but said it is “overall purchases of both of these that are really providing accommodation .… They’re providing monetary accommodation in tandem for … providing support for economic recovery.”
He refused to give a timetable for a tapering decision. “I’m not going to give a forecast on when the committee will come to a decision. I do think we do have to watch the data carefully.”
The current economic environment is far too unclear and uncertain, he suggested.
“In the last few months, we’ve seen some strong movements and cross currents in both the employment and inflation data …,” he said. “I want to see more data” to allow him to “draw stronger conclusions about inflation and employment….”
“So we’ll just have to see on that,” he added.
“This is a time of very high uncertainty…,” he went on. So “we need to watch the data carefully and analyze it and make an appropriate decision when we have the information to make those decisions.”
Williams said the FOMC has given itself “the flexibility to adjust as appropriate” by using “outcome-based guidance .… It’s really about achieving our maximum employment and inflation goals – ‘substantial further progress’ based on what the data are telling us ….”
“The timing will follow from that,” he said.
Whenever the Fed does start tapering, Williams said it will amount to “taking our foot off the gas, not putting our foot on the brake.” Tapering will “proceed gradually over time,” he said.
As the FOMC has previously indicated, Williams said tapering will precede liftoff. Tapering first “sets up good point to think about adjusting short-term interest rates.”
Asked about asset price “inflation,” Williams said that is “clearly something on my mind,” adding that home prices “have increased very strongly” and equity prices are at “very high levels.”
“Clearly, asset prices look very stretched relative to historical norms,” he said.
However, Williams said he sees “less downside risk” to financial stability, despite “some asset overvaluation,” because of strengthened financial safeguards,
“The banking system is well positioned,” he said, and the strengthening of the regulatory and supervisory framework … puts us at less risk of major financial instability or economic consequences if there is some downward adjustment in asset prices.”
Regarding consumer prices, Williams noted there have been spikes in a variety of goods prices “related to the reopening of the economy and disruptions of supply channels” and said “we’re watching that very carefully” to see if price pressures fade or persist.
“It’s still too early to tell how things are going to evolve…,” he said. “We need to get more data .…”
As for the recent decline in Treasury yields, Williams cited “some disappointment around global economic developments, especially around the Delta variant,” some softer economic data and a “notion that once we’re through this episode we’ll be back in the world before with a low neutral rate.” He also cited “technical” retracement of the earlier upsurge in yields.
Earlier, in response to questions from Bank of Israel Governor Amir Yaron, Williams said raising the funds rate will be “relatively straightforward” when the time comes, but he said “more challenging and more uncertain is changing the parameters of asset purchases – both starting and ending it.”
Williams stressed the importance of anchoring inflation expectations and emphasized that to do that the Fed must actually “deliver” average 2% inflation over time. And he said the Fed’s “flexible average inflation targeting” framework has helped lift inflation expectations.
He emphasized the need for the Fed to focus on the “medium-term” inflation outlook and “look through” “temporary” price increases.
Further suggesting a lack of urgency about tightening monetary policy, he said the Fed has learned since the financial crisis that “the economy can run very strong with strong employment, low unemployment without creating inflation pressures.”
In prepared remarks, Williams said the monetary policies of the Fed and other central banks will likely remain constrained by a “dramatic decline in r-star” or the “neutral” short-term interest rate indefinitely.
“Several global developments have driven this decline—including demographic shifts, lower productivity growth, and increased demand for safe assets—and these trends do not appear likely to reverse anytime soon,” he said.
Speaking in a theoretical vein, Williams defended average inflation targeting against charges that such policy frameworks imply “sharp reversals of interest rates as monetary policy exits a ‘lower for longer’ episode and may find itself ‘behind the curve.’”
In fact, Williams maintained, “there is no predictable pattern of sharp reversals or large overshooting of policy rates relative to neutral, either for static or dynamic AIT (average inflation targeting) policies. It is true that nominal and real interest rates have more room to fall under AIT policies in response to negative shocks compared to inflation targeting, and therefore the rebound to the neutral rate is correspondingly larger. But, that larger rebound is a feature of the success of the policy…..”
FOMC participants expect to keep the federal funds rate in a zero to 25 basis point target range through this year and anticipate two 25 basis point rate hikes by the end of 2022.