–Substantial Further Progress ‘Quite a Ways Off’ but Progress Made for Sure
By Steven K. Beckner
(MaceNews) – New York Federal Reserve Bank President John Williams Monday reaffirmed Chairman Jerome Powell’s signal that Fed policymakers will be starting to consider a reduction in asset purchases at future Federal Open Market Committee meetings.
The discussions will include not just the pact of asset purchases, but also their composition, said Williams, opening the door to alterations in the amount or proportion of mortgage backed securities bought relative to Treasury securities, Williams made clear.
Williams said the Fed is still “quite a ways off” from his idea of “substantial further progress” toward “maximum employment” and average 2% inflation – standards the FOMC set last December for tapering – but suggested enough progress has been made to at least begin what he suggested will be a fairly long and involved process of assessing the amount of progress.
The FOMC, of which he is vice chairman, is now “talking about talking about” tapering bond buying, Williams told reporters following a webinar hosted by the Midsize Bank Coalition of America.
Williams’ remarks were the first since Chairman Jerome Powell signaled, after last Wednesday’s FOMC meeting, that the Committee is on the verge of considering a reduction in the pace of Fed asset purchases.
The FOMC left the federal funds rate in a zero to 25 basis point target range and announced that, for the time being, the Fed would continue buying $120 of bonds per month until “substantial further progress” has been made toward its maximum employment and average 2% inflation goals. But Powell used his press conference to indicate enough progress had been made for the FOMC to discuss “tapering” “in coming meetings.”
Powell, who had previously said he and his colleagues weren’t even “thinking about thinking about” raising rates or otherwise tightening monetary policy, told reporters, “you can think of this meeting that we had as the ‘talking about talking about’ meeting, if you like. And I now suggest that we retire that term, which has served its purpose well, I think.”
“Committee participants were of the view that, since we adopted that guidance in December, the economy has clearly made progress, although we are still a ways from our goal of ‘substantial further progress,’” Powell continued. “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.”
Powell said the tapering discussion will begin at the FOMC’s July 27-28 meeting.
Reinforcing Powell’s market-shaking message was a shortening of the anticipated period for leaving the funds rate near the zero lower bound, as FOMC participants upgraded their economic forecasts and projected “liftoff” for that key short-term money market rate will come in 2023, rather than 2024, as implied by their March Summary of Economic Projections. The median funds rate projection for the end of 2023 is now 0.6%, implying two 25 basis point rate hikes, instead of the 0.1% projected in March.
Powell said the “dot plot” does not constitute a Committee forecast or plan, but said the SEP does show “many participants are more comfortable that the economic conditions in the Committee’s forward guidance will be met somewhat sooner than previously anticipated … . If such outcomes materialize, it means the economy will have made faster progress toward our goals.
When asked how he sees the prospect of tapering, Williams said his “view is that we set out the ‘substantial further progress’ marker last December. Literally, we have to assess over time how we’re doing on our two maximum employment and price stability goals relative to that mark.”
Deciding when to taper will be a matter of “judgment,” he said. “We don’t have any specific empirical goals. We’re really assessing qualitatively and consistent with our framework and strategy.”
“So from my point of view, as the chair said, we’re talking about talking about this topic,” Williams said, adding, “From my perspective we are quite a ways off from achieving my interpretation of ‘substantial further progress’, but we’ve also made some progress for sure.”
“We’ve seen progress on employment; we’ve definitely seen a big increase in inflation, but we also want to make sure that we understand to what extent that’s shifting the outlook for inflation,” he elaborated. “So it’s really (about) looking at the data carefully, assessing … what we’ve seen in terms of the goals, and as the chair said, over time coming to some determination around the progress we’ve made relative to ‘substantial further progress’ and then communicating that assessment in a very clear in advance, transparent way around our thinking and also around any decisions that are made on the timing of that.”
Williams said “it’s really a start to me of a process of looking at the data, assessing progress. thinking through that and then, over time, as that assessment continues, to communicate as clearly as we can as a committee around that and around our thinking going forward as transparently and as much in advance as is practical.”
He emphasized that the FOMC will take “very much an outcome-based” approach. “So it’s really hard to say when we get there because it will really depends on how the economy unfolds, how it evolves and assessing the various dimensions on the employment and price inflation side.”
“So it’s hard to say when that will be or anything, but I think, as the chair laid out Wednesday and consistent with that, this is going to be something that we’re going to be very engaged in in the meetings going forward.”
Williams described himself as “pretty optimistic,’ forecasting 7% GDP growth and “solid progress on employment.” But he added, “we’re going to have to see what the actual data are showing… A forecast is one thing, but we’ll want to see that ‘substantial further progress’ actually happen.
In prepared remarks to the regional bankers, he said, “we’ve come a long way since the darkest days of the pandemic, and I expect even brighter days ahead … . The economy is reopening more quickly and more strongly than expected. When it comes to the economy, it’s getting better all the time.”
However, he also said, “I cannot stress enough that we still have a long way to go to get back to full strength. For example, there are still over seven million fewer jobs today than before the pandemic.”
Williams largely dismissed inflation risks following a report showing the consumer price index rising 5% from a year earlier in May – worst in 13 years. He echoed Powell and others in saying the upsurge is likely to prove “temporary,” although he acknowledged there are “upside risks” which must be “watched carefully.”
Responding to a webinar question, he said the FOMC must analyze whether or not longer term disinflationary trends have fundamentally changed” and whether recent price surges are “really about a reopening economy or are there signs of more long-term, persistent” inflation pressures.
Like many of his colleagues, Williams said the Fed “has the tools” to address inflation if needed.
In the aftermath of Powell’s comments and the FOMC “dot plot” revisions, the 10-year note yield leaped nearly 10 basis points at its peak last Thursday while the Dow Jones Industrial Average plunged as much as 1149 points by Friday. Stocks and bond have since rallied.
Asked about the market reaction, Williams said, “overall I would not describe this as a mimi-taper tantrum,” as a MaceNews reporter had called it, but “just a market adjustment.”
He described the moves as “pretty modest adjustments” and said, “overall 10-year Treasuries haven’t’ moved very much at all” and “other metrics from the market haven‘t moved that much.”
Williams predicted that downward pressure on short-term money market rates, which prompted the FOMC to raise two administered rates by 5 basis points will continue indefinitely.
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Contact this reporter: steve@macenews.com.
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