– Fed Progress Goal Met For Inflation, But Not for Employment
– Very Good Progress Made On Jobs, But Wants To See More
– MBS, Treasury Purchases Complementary; ‘Working Side By Side Together’
– Timing of Liftoff Doesn’t Depend on Timing of Tapering
By Steven K. Beckner
(MaceNews) – New York Federal Reserve Bank President John Williams suggested Wednesday that continued caution and patience in the conduct of monetary policy is in order amid ongoing employment shortfalls and Covid-related uncertainties.
Williams said the Fed “could” decide to scale back asset purchases before the end of the year, but said he wants to see more data before concluding there has been “substantial further progress” toward both the inflation and employment goals – the standard the Fed’s policymaking Federal Open Market Committee set last December as forward guidance for starting to taper its $120 billion monthly bond buying.
Those goals have only been partially met in the mind of the FOMC vice chairman.
“I think it’s clear that we have made substantial further progress on achieving our inflation goal,” he told a St. Lawrence University webinar audience in prepared remarks, but “there is still a long way to go before reaching maximum employment.”
Whenever tapering begins, Williams suggested he would not favor a disproportionate reduction in purchases of agency mortgage backed securities, saying that MBS and Treasury purchases “work side by side together.”
He also said tapering need not necessarily proceed at the same pace as in 2014 and that “liftoff” from the zero lower bound for the federal funds rate will be determined by a totally separate “threshold” of employment and inflation progress.
For now, Williams made clear he is not satisfied with the amount of improvement in the labor market.
While there has been “very good progress toward maximum employment,” Williams said he “will want to see more improvement before I am ready to declare the test of substantial further progress being met.”
However, Williams emphasized to reporters after the webinar that progress toward maximum employment should be measured in terms of “cumulative” gains since last December, not monthly non-farm payroll gains – this after the Labor Department reported a much-less-than expected 235,000 August payroll gain but revised prior months upward.
Williams does not see elevated inflation as a reason to rush into tapering. “Taking a closer look at the data, it’s clear that this spike in inflation largely reflects the transitory effects of the rapid reopening of the economy, which is pushing supply and demand in extreme ways, he said. “As the economy gets through these unusual dynamics, I expect inflation to come back down to around 2% next year.”
Besides, “various measures of longer-term inflation expectations are at levels consistent with our 2% long-run goal.”
“After this year’s spike in inflation related to the effects of the pandemic—and with inflation expectations and other measures of underlying inflation close to our 2% longer run goal—I expect inflation pressures to moderate over time and for the inflation rate to come back to its underlying trend of around 2% next year,” he went on.
Williams also implied that the mounting number of Covid cases associated with the “Delta variant” is an additional reason for caution.
“Even while there are significant improvements in some areas, setbacks persist in many others,” he said. “And now, the emergence and rapid spread of the Delta variant in parts of the country and around the world has introduced a new layer of uncertainty.”
Later, he suggested to reporters that this is a confusing time for the Fed officials and economists seeking to assess the outlook and set policy appropriately. “A lot of things have happened together that have negatively affected” the labor market, he observed. “We’re seeing a lot of churn…We have to watch carefully.”
“The uncertainty is very big,” he said. “We have to keep watching the data carefully…”
While acknowledging that the economy has enjoyed a ‘strong pace of growth” since the onset of the pandemic, Williams said “a full recovery from the pandemic will take quite some time to complete.”
Indeed, he noted, “there are indications in the most recent data that the spread of the Delta variant is weighing on consumer spending and jobs, and the pace of growth appears to be slowing somewhatrelative to the first half.”
Likewise, he said, “I cannot stress enough that we still have along way to go to get back to our maximum employment goal.For example, there are still over five million fewer jobs today than before the pandemic, and the unemployment rate is still far above the levels reached early last year.”
He said he is “confident that we will continue to see meaningful job gains and continued progress toward maximum employment,” but made clear he wants to see actual evidence of that.
Against that backdrop, Williams was ambivalent about reducing the amount of monetary stimulus the Fed is providing via “quantitative easing” asset purchases.
“Assuming the economy continues to improve as I anticipate, it could be appropriate to start reducing the pace of asset purchases this year,” he said. “I will be carefully assessing the incoming data on the labor market and what it means for the economic outlook, as well as assessing risks such as the effects of the Delta variant.”
Williams was echoing what Fed Chairman Jerome Powell said in his Aug. 27 Jackson Hole speech, when he too said “it could be appropriate” to reduce bond buying before year-end, but stopped well short of signaling when “tapering” will actually occur, as he balanced continued progress on employment with the spread of the Delta variant and said the Fed needs to be “carefully assessing incoming data and the evolving risks” before moving ahead.
What’s more, Powell warned it would be a “costly” “mistake” to tighten monetary policy in response to an inflationary upsurge he deemed “temporary.”
After Powell spoke, the Labor Department released a much weaker than expected August employment report, which was widely interpreted as delaying tapering. Corporate purchasing manager surveys and other data have also reflected a slowing of economic activity amid mounting concerns about the virus.
Williams’ remarks were largely in line with the approach Powell was taking prior to the employment report.
Taking questions from webinar participants and then from reporters, Williams repeatedly stressed that “we’re not there now” in terms of achieving maximum employment. And he said he and his FOMC colleagues want to see “maximum inclusive employment.”
However, Williams seemed to deemphasize the importance of the disappointing August payroll figure, saying that the achievement of “substantial further progress” “is a level condition, not a speed condition” in terms of “where are we relative to maximum employment.”
What matters is “the accumulation of gains since last December,” he continued, adding “some months can be stronger, some weaker… It’s really about the level.”
Asked by Mace News about the perception among some that the Fed needs to get on with tapering so that it can then get on with liftoff, Williams chuckled and said that, in fact, the FOMC has been “very clear that the things we’re looking to see” for tapering are “different markers than what we want to see to set out for actual liftoff.”
Williams described the test for raising the funds rate as “pretty stringent” and said decisions on tapering and on subsequent lift off and “really do have very different thresholds.”
“They are separate,” he emphasized, adding that this is particularly true with regard to maximum employment. “We’re not close to that now.”
(The FOMC has said it will hold the 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% for some time.” The standard for tapering is to make “substantial further progress” toward those goals relative to December 2020).
As to when tapering will end, Williams said “the FOMC will have to discuss and decide…From my perspective, it’s really about an assessment, when you think about pace, of what have we achieved in terms of substantial further progress and the trajectory of the economy, taking into account all that information.”
Asked whether the pace of tapering will be similar to 2014, when the Fed cut purchases by $10 billion per month, evenly divided between MBS and Treasuries, Williams said the FOMC need not be held to that replied that “there was a different set of circumstances” when the Fed last tapered.
“We have the ability to set our policy as we see appropriate,” he said. “We don’t have to do exactly as we did before.”
As he has previously, Williams indicated he does not favor tapering MBS purchases earlier or faster than Treasury purchases. He said he sees the two kinds of securities purchases as being “very complementary.”
“They are working primarily through the same channel…” to make financial conditions “more accommodative of growth,” he went on. “They’re very effective working together…They mainly are the same tools working side by side together.”
While seeming to suggest that the FOMC should proceed only slowly and gradually to firm monetary policy, Williams said it can and should be flexible.
“To my mind, if inflation is persistently higher than we expect or desired that would be one of the inputs into desirable policy,” he said in response to a webinar participant’s question. Likewise, “if employment (progress) moves faster we might have to adjust policy.”
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Contact this reporter: steve@macenews.com.
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