–Some Favored Preparing To Taper ‘Relatively Soon;’ Others Counseled ‘Patience’
–Discussions Took Place Amid ‘Quite High’ Uncertainty Before Strong July Jobs Data
By Steven K. Beckner
(MaceNews) – Federal Reserve officials began to seriously consider when and how to reduce asset purchases at the July 27-28 meeting of the Fed’s policymaking Federal Open Market Committee, but disagreed about the timing and pace of “tapering,” minutes released Wednesday show.
The minutes reveal considerable uncertainty about the economic outlook and consequently a lack of consensus on beginning to scale back the Fed’s monthly purchases of $80 billion of Treasury and $40 billion of agency mortgage backed securities.
Although the 18 FOMC participants agreed that sufficient progress had not yet been made toward their “maximum inclusive employment” and average 2% inflation goals, they believed further progress was likely and that the Fed’s standard for tapering “could be reached this year.”
However, the six Federal Reserve governors and 12 Federal Reserve Bank presidents had varying views on the timing of tapering, with “some” wanting to prepare to start the process “relatively soon” but others counseling “patience.”
Because the minutes focus on discussions that took place July 27-28, they do not reflect any subsequent change in Fed officials’ perspectives, notably how their viewpoints may have been affected by the stronger-than-expected July employment report released on Aug. 6.
It is known, however, that last month’s leap in non-farm payrolls, drop in unemployment and acceleration of wage gains did impact policymakers’ thinking. For instance, voting Chicago Federal Reserve Bank President Charles Evans sounded noticeably more willing to scale asset purchases in an Aug. 10 media scrum.
Observing that, “We’ve made a lot of progress,” Evans said, “We’re well on our way to be being able to make some adjustments” to asset purchases.
The FOMC voted to leave the federal funds rate in a zero-to-25 basis point target range and to keep 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 its policy statement edged toward tapering by noting, “The economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings.”
After the meeting, Powell had told reporters the FOMC had “continued to discuss the progress made toward our goals since the Committee adopted its asset purchase guidance last December,” and “we also reviewed some considerations around how our asset purchases might be adjusted, including their pace and composition, once economic conditions warrant a change.”
Powell said FOMC participants “expect that the economy will continue to move toward our standard of ‘substantial further progress.’ 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.”
But as of July 28 Powell said, “We’re not at substantial further progress” and said there is “ground to cover to get there.” He said, “We are some way away from having had substantial further progress toward our maximum employment goal,” adding he wanted more “strong job numbers.” While inflation was running much higher than 2%, he predicted it would come back down to that average target rate.
Despite the strong July job numbers, Powell continued to cite downside Covid-related risks and a need for further progress on employment in Tuesday town hall remarks.
The minutes largely comport with what Powell said at his post-FOMC press conference and do not add a lot to what was known about officials’ policy inclinations prior to the employment report. Nevertheless, the minutes do provide a useful snapshot of how various blocs of FOMC participants saw the economic and monetary policy outlook three weeks ago.
In discussing the progress made toward the FOMC’s goals since they were enunciated in December 2020, the minutes say participants “generally judged that the Committee’s standard of ‘substantial further progress’ toward the maximum-employment and inflation goals had not yet been met, particularly with respect to labor market conditions, and that risks to the economic outlook remained.”
However, “most participants anticipated that the economy would continue to make progress toward those goals and, provided that the economy evolved broadly as they anticipated, they judged that the standard set out in the Committee’s guidance regarding asset purchases could be reached this year,” the minutes add.
Although Fed officials saw “strong” demand for workers, “several participants emphasized that employment remained well below its pre-pandemic level and that a robust labor market, supported by a continuation of accommodative monetary policy, would allow further progress toward the Committee’s broad and inclusive maximum-employment goal and a return over time to labor market conditions as strong as those prevailing before the pandemic.”
There was less concern about inflation running well above target, with most officials agreeing with Powell’s frequent assertion that upward price pressures were likely to be “transitory.” Some worried that inflation could remain elevated into next year, but others expressed concern about a renewed undershooting of the inflation target..
In the discussion of asset purchases, the minutes say “many participants remarked upon risk-management considerations when contemplating how and when to make changes to the Committee’s pace of asset purchases.” But opinions varied on the best approach.
“Some participants suggested that it would be prudent for the Committee to prepare for starting to reduce its pace of asset purchases relatively soon, in light of the risk that the recent high inflation readings could prove to be more persistent than they had anticipated and because an earlier start to reducing asset purchases would most likely enable additions to securities holdings to be concluded before the Committee judged it appropriate to raise the federal funds rate,” the minutes disclose.
Adding to the rationale for early tapering, “a few participants expressed concerns that maintaining highly accommodative financial conditions might contribute to a further buildup in risk to the financial system that could impede the attainment of the Committee’s dual-mandate goals.”
However, there were also voices for more of a go-slow approach. “In contrast, a few other participants suggested that preparations for reducing the pace of asset purchases should encompass the possibility that the reductions might not occur for some time and highlighted the risks that rising COVID-19 cases associated with the spread of the Delta variant could cause delays in returning to work and school and so damp the economic recovery.”
“Several participants also remained concerned about the medium term outlook for inflation and the possibility of the reemergence of significant downward pressure on inflation, especially in light of the recent decline in longer term inflation compensation,” the minutes say. “In addition, several participants emphasized that there was considerable uncertainty about the likely resolution of the labor market shortages and supply bottlenecks and about the influence of pandemic-related developments on longer-run labor market and inflation dynamics.”
Among the unenumerated officials who had reservations about an early taper, the minutes say “those participants stressed that the Committee should be patient in assessing progress toward its goals and in announcing changes to its plans on asset purchases.”
The minutes go on to detail how different officials viewed reduced asset purchases relative to eventual “liftoff” from the zero lower bound for the funds rate.
“A couple of participants … noted that a tapering of asset purchases did not amount to a tightening of the stance of monetary policy and instead only implied that additional monetary accommodation would be provided at a slower rate,” they say, and “several participants emphasized that an announcement of a reduction in the Committee’s pace of asset purchases should not be interpreted as the beginning of a predetermined course for raising the federal funds rate from its current level.”
Those participants stressed that “the Committee’s assessment regarding the appropriate timing of an increase in the target range for the federal funds rate was separate from its current deliberations on asset purchases and the Committee’s outcome-based guidance on the federal funds rate.”
However, “a couple of participants cautioned that it could be challenging for the public to disentangle deliberations about the two tools and that any decisions the Committee made on its asset purchases would likely influence the public’s understanding of the Committee’s other policy intentions, including with regard to future decisions concerning the target range for the federal funds rate.”
These discussions took place against the backdrop of an economy that, while recovering strongly, still faced a hazy future.
“In discussing the uncertainty and risks associated with the economic outlook, many participants remarked that uncertainty was quite high, with slowing in progress on vaccinations and developments surrounding the Delta variant posing downside risks to the economic outlook,” say the minutes.
What’s more, “a number of participants judged that the effects of supply chain disruptions and labor shortages would likely complicate the task of interpreting the incoming data and assessing the speed at which these supply-side factors would dissipate.”
And “some participants noted that there were upside risks to inflation associated with concerns that supply disruptions and labor shortages might linger for longer than currently anticipated and might have larger or more persistent effects on prices and wages than they currently assumed.”
The officials also cast a wary eye on financial markets, in which stocks were surging and bond yields were falling.
Contact this reporter: steve@macenews.com.
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