By Steven K. Beckner
(MaceNews) – Federal Reserve policy-makers voted Wednesday to maintain their super loose credit policies, and Chair Jerome Powell gave no hint the Fed will move to tighten its monetary stance any time soon.
While joining his colleagues in expressing encouragement with the economy’s improved performance and optimism about the outlook, Powell continued to emphasize the need for caution in the face of extraordinary uncertainties, seemingly signaling he and his fellow policymakers are a long way from even considering a less aggressively accommodative posture.
“We will continue to provide the economy with the support that it needs for as long as it takes,” he told reporters after the Fed’s rate-setting Federal Open Market Committee concluded a two-day meeting by leaving monetary policy unchanged.
Until it gets an overt signal from the Fed, markets should not assume the FOMC is on the verge of considering “tapering” of asset purchases, he said. But he strongly suggested such a signal is still a long way off.
Powell gave no indication he is chagrined by the recent run-up in bond yields and market gauges of inflation expectations.
The Fed chief gave a welcoming nod to fiscal policy following enactment of a $1.9 trillion “relief” bill which provides another round of stimulus checks, extends federal unemployment benefits and expands federal spending on an array of other programs, not all of them pandemic related.
Earlier, the FOMC voted unanimously to leave the federal funds rate in a zero to 25 basis point target range and reaffirmed its intention to keep buying $120 billion of bonds per month. And FOMC participants projected that it will remain appropriate to keep the funds rate near the zero lower bound through 2023.
Echoing previous policy statements, 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 repeated 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.”
Powell said “these measures, along with our strong guidance on interest rates and our balance sheet, will insure that monetary policy will continue to deliver powerful support to the economy until the recovery is complete.”
The policy statement’s characterization of economic conditions is somewhat more upbeat than the one the FOMC issued in January, which noted the pace of recovery had “moderated” due to “weakness concentrated in the sectors most adversely affected by the pandemic.” The February statement said, “Following a moderation in the pace of the recovery, indicators of economic activity and employment have turned up recently, although the sectors most adversely affected by the pandemic remain weak.”
Despite a steepening of the yield curve, the FOMC statement reiterated that “overall financial conditions remain accommodative.” Powell made the same appraisal.
As before, the FOMC said the economy’s path will “depend significantly” on the course of the virus and that “considerable risks” remain.
In their quarterly Summary of Economic Projections, the 18 FOMC participants revised up their growth forecast of real GDP growth this year to 6.5% on a fourth quarter over fourth quarter basis, from 4.2% in the December SEP. GDP is projected to grow 3.3% in 2022 and 2.2% in 2023. Longer run (or potential) GDP growth is estimated at 1.8%.
The officials, including non-voting Federal Reserve Bank presidents, now forecast the unemployment rate will fall to 4.5% by the end of this year, compared to a December forecast of 5.0%. Unemployment is expected to fall to 3.9% in 2022, and 3.5% in 2023. Longer run unemployment is estimated to be 4.0%, down from 4.1% in December.
FOMC participants forecast inflation, as measured by the price index for personal consumption expenditures, at 2.4% by the fourth quarter, compared to a December forecast of 1.8%, although core PCE is forecast to rise 2.2%. The overall PCE is forecast to rise by 2.0% in 2022 and 2.1% in 2023, compared to the FOMC’s average target of 2%.
Despite the rosier growth and job forecasts, FOMC participants’ median projection for the funds rate remained at 0.1% through 2023. Eleven of the 18 participants see the funds rate staying in the zero to 25 basis point target range through the end of 2023, compared to 12 of 17 in the December SEP.
Powell suggested too much should not be made of the fact that one less official thinks the funds rate will need to stay near zero through 2023, noting that each individual’s projection is based on differing forecasts and economic assumptions and that the outlook is uncertain.
“The strong bulk of the Committee is not showing a rate increase during this forecast period,” he observed. With economic data having improved “very significantly since the December meeting, you would expect forecasts to move up.”
“It’s probably not a surprise that some people would bring in their estimate of the appropriate time for liftoff,” he continued. “Nonetheless, the bulk of the Committee, the largest part by far of the Committee, is — doesn’t show a rate increase during this period.”
Before liftoff of the funds rate, the Fed has let it be known that it would first reduce, if not cease, asset purchases, but Powell was vague about the timing of tapering.
Repeating familiar themes, he said the FOMC would be “patient” and would need to see “actual progress, not forecast progress” toward its maximum employment and 2%-plus inflation objectives.
“What we mean by that is pretty straightforward,” he went on. “It is we want to see that the labor markets have moved – …have made substantial progress toward maximum employment and inflation has made substantial progress toward the 2% goal. That’s what we are going to want to see.”
Powell added that this will include “an element of judgment.” Once it sees “substantial further progress,” the FOMC will “clearly communicate” to markets and the public well ahead of time, he promised.
“We will be carefully looking ahead,” Powell said. “We also understand that we will want to provide as much advance notice of any potential taper as possible. So, when we see that we are on track, when we see actual data coming in that suggests that we are on track to perhaps achieve substantial further progress, then we’ll say so. And we’ll say so well in advance of any decision to actually taper.”
Powell suggested the time to send such a signal is well into the future. Despite February’s 379,000 non-farm payroll gain, he noted that nearly 10 million people are still out of work compared to before the pandemic, “and it’s going to take some time” for those people to get back to work.
He emphasized the FOMC will be looking at “a broad range” of labor market indicators to determine “substantial further progress” toward maximum employment, not just the headline unemployment rate.
“We think the stance of monetary policy remains appropriate,” Powell said. “Our guidance on the federal funds rate and on asset purchases is providing strong support for the economy, and we are committed to maintaining that patiently accommodative stance until the job and well and truly done.”
As reporters continued to press Powell on when the FOMC might begin tapering asset purchases, Powell contrasted the February job gain to the prior three months of much more modest increases and said, “It can go so much higher, though, and it would be nice to really make faster progress.”
“That’s different from substantial progress,” he said. ”We’d like to see it be higher than that ….”
“So, what I am saying is to achieve substantial progress from where we are, having had three months of very little progress, is going to take some time,” he continued. “And … I don’t want to get into trying to put a pin on the calendar someplace because it’s going to be data dependent.”
“When we see ourselves on track to make substantial further progress, we are going to say so,” Powell went on. “We understand fully that that test is one that involves judgment …. What we are saying is substantial further progress toward our goals.”
Powell vowed “we will tell people when we think” and added, “until we give a signal, you can assume we are not there yet.” He suggested that the Fed will give plenty of notice before it even starts talking about tapering.
“As we approach it, well in advance — well in advance – we will give a signal that, yes, we are on a path to possibly achieve that, to consider tapering,” he said. “So that’s how we are planning to handle it. It’s not different, really, from QE3, and I think we’ve learned what we’ve learned from the experience of these last dozen years is to communicate very carefully, very clearly, well in advance, and then follow through with your communications.”
As the FOMC decision approached, the 10-year Treasury note yield climbed to 1.68%, compared to 0.90% to start the year, even as short-term rates plunged, signifying investor concerns that lax monetary policy will fuel higher inflation and necessitate eventual rate hikes.
Market inflation expectations have jumped, as shown by the widening spread between regular and inflation protected Treasury securities (TIPS). That so-called breakeven rate has climbed as high as 2.54%, compared to 1.98% at the start of this year and 0.16 basis points a year ago.
In recent weeks, Powell has made light of these phenomena, contending they are not just understandable but desirable — reflections of a strengthening economy and a recognition by markets that the Fed means what it says in committing to push inflation “moderately” above 2%.
But Powell gave no indication he is worried about the spike in yields or break-evens. “If you look at various indexes of financial conditions, what you will see is they generally do show financial conditions overall to be highly accommodative,” he said. “And that is appropriate. That’s how we look at it.
“I would add, as I’ve said, I would be concerned by disorderly conditions in markets or by a persistent tightening of financial conditions that threaten the achievement of our goals,” he said.
Markets are keen to know when the Fed will alter the pace or composition of asset purchases to counter market trends and what the FOMC means by saying asset purchases will continue at the $120 billion monthly pace until “substantial further progress” has been made toward its goals. Some have suggested the Fed might extend the duration of its Treasury purchases.
But Powell merely said the current mix of $80 billion in Treasuries and $40 billion in mortgage backed securities is “the right place for our asset purchases.”