- Half of FOMC Participants Now See Funds Rate Hike By End 2022
- Powell Says FOMC Could Announce Bond Buying Cuts At Nov. 2-3 Meeting
- Powell Says Inflation Test More Than Met; Employment Goal ‘All But Met’
By Steven K. Beckner
(MaceNews) – The Federal Reserve took another incremental but very significant step toward making monetary policy less aggressively stimulative Wednesday, as its policy-making body set the stage for a reduction in its massive bond buying “soon.”
The Fed’s interest rate-setting Federal Open Market Committee stopped short of announcing reductions in the massive asset purchases it has been doing since last March, but clearly signaled “tapering” will start in the fairly near future – provided “progress” continues toward the FOMC’s objectives.
For the time being, the FOMC reaffirmed an intention to keep buying $40 billion of agency mortgage backed securities and $80 billion per month “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”
But Chairman Jerome Powell said a tapering announcement “could come as soon as our next meeting,” scheduled for Nov. 2-3. If the FOMC follows precedent, actual reductions in bond buying would then commence in December.
Powell seemed to set the bar for tapering fairly low by saying that inflation has already greatly exceeded the Fed’s average 2% target and asserting that its employment objective has been “all but met.”
Meanwhile, the FOMC left the federal funds rate in a zero to 25 basis point target range, but the latest projections from Federal Reserve governors and bank presidents suggest the FOMC may start raising it by the end of next year.
The Fed, which has been buying $120 billion of securities per month to hold down long-term interest rates, while holding short-term rates near zero, has been delaying tapering until “substantial further progress” is made toward its 2% average inflation and “maximum employment” goals relative to December 2020. But Powell and his fellow FOMC members have now concluded sufficient progress has been made to seriously consider an initial cut in bond purchases at the upcoming meeting.
“Since then (December 2020), the economy has made progress toward these goals,” the FOMC said in its policy statement. “If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.”
That is considerably stronger language than the FOMC used in the July 28 statement, when it said, “Since then , the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings.”
At the Fed’s annual Jackson Hole symposium in late August, Powell said “it could be appropriate” to reduce bond buying before year’s end, but subsequent soft data left the timing in doubt.
Now, following the FOMC meeting, Powell sounded much more decisive. “If the economy continues to progress largely in line with expectations and the overall situation is appropriate we could easily move ahead at the next meeting,” he told reporters.
Echoing the FOMC statement, he told reporters he and his colleagues had “discuss(ed) the progress made toward our goals” and had decided “the economy has made progress toward these goals. If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.”
Elaborating, Powell left no doubt that he is ready to start slowing the pace of bond buying without much further delay. He said he does not to see a “knock-out’ September employment report, only a “decent one,” given the “accumulated progress” already made in the labor market.
Addressing the FOMC’s dual standards for tapering, he noted that “for inflation we appear to have achieved more than substantial further progress, so that part of test has been achieved.” As for the goal of “maximum employment,” he said the economy has moved “more than half the distance” to where it was last December and where it was before Covid hit.
“So 50% of that road has been traveled,” he continued. “That can be substantial further progress.”
“Many feel the substantial further progress test for employment has been met,” while “others (think it’s) close, but want to see more progress,” he went on, adding that, as far as he’s concerned the employment objective is “all but met.”
“As soon as the next meeting,” Powell said the FOMC “will consider that test and the broader environment at that time and make a decision whether to taper,” Powell said.
The Fed chief said the FOMC also discussed the “appropriate pace of tapering asset purchases” and said that “while no decisions were made, participants generally view that, so long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate.”
Though nearly ready to get going with tapering, the FOMC continued to signal it is a long way from “lifting off” the zero lower bound for the federal funds rate, though not as far as it was earlier this year.
Once again, there was sharp division among FOMC participants on the timing of liftoff, as shown in the funds rate “dot plot” included in the latest quarterly Summary of Economic Projections. But half of the FOMC participants – nine of 18 – now project one or more increases in the federal funds rate by the end of next year – up from from seven in the June SEP. Two of the eight foresaw two 2022 rate hikes.
The revised median funds rate projection is 0.3% for 2022 and 1.0% for 2023. In June the median projection was 0.1% for 2022 and 0.6% for 2023.
Powell made clear “liftoff” from the zero lower bound will only come after “tapering” has finished. Taking pains to separate the two policies, he said, “the timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test.”
Powell stressed that, even after the FOMC starts raising the funds rate, monetary policy would remain relatively accommodative. “Participants generally expect a gradual pace of policy firming that would leave the level of the federal funds rate below estimates of its longer-run level through 2024.”
Were inflation or other conditions to evolve such that the FOMC felt that monetary policy needed to be tightened sooner, he said the Fed would speed up the pace of tapering rather than begin to raise the funds rate before tapering had been completed.
The latest quarterly SEP includes more optimistic forecasts for growth, unemployment and inflation. Real GDP growth is now projected at 3.8% next year, five tenths higher than in June, before slowing to 2.5% in 2023. The unemployment rate is expected to fall to 3.8% next year and to 3.5% the following year.
After rising an estimated 4.2% this year, PCE inflation is projected to run 2.2% in each of the next two years. Core inflation is projected at 2.1% and 2.2% respectively.
The FOMC’s decision comes against a backdrop of mixed economic indicators for August, colored by renewed public health restrictions in response to rising Covid cases. The labor market continued to improve, but at a much slower pace, as non-farm payrolls increased by a much lower-than-expected 235,000. Corporate purchasing managers reported a slower pace of growth in the non-manufacturing sector. Consumer spending rebounded, with retail sales rising 0.7%, following a July drop.
Meanwhile, there were tentative signs of cooling inflation. The consumer price index rose 0.3% (5.3% higher than a year earlier) last month, after rising 0.5% (5.4% year-over-year) in July. The core CPI’s year-over-year rise slowed from 4.3% to 4.0%. Inflation expectations, which the Fed is keen to keep “well-anchored,” have stayed largely contained.
In its characterization of economic conditions, the FOMC said, “With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen…. 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.”
The FOMC said “inflation is elevated, largely reflecting transitory factors.”
As he has before, Powell said that if inflation pressures or inflation expectations were to prove “troubling” or “persistent” the FOMC “would react.”