– If Start Taper Soon, Can Be ‘Smooth,’ Not Disruptive
– Ending Taper By Mid-2022 ‘Reasonable’
– Inflation Test Met; ‘Lot of Progress’ Made On Employment
– FOMC Shouldn’t Lift Off Too Soon; Want To Achieve Maximum Employment
By Steven K. Beckner
(MaceNews) – New York Federal Reserve Bank President John Williams strongly suggested he will vote to start scaling back asset purchases at the Nov. 2-3 meeting of the Fed’s policy-making Federal open Market Committee Monday, but was vague about when the FOMC should start raising the federal funds rate.
Williams, talking to reporters following a webinar hosted by the Economic Club of New York, said “tapering” of bond buying can be done in a “smooth,” non-disruptive way and said it is “reasonable” to expect that the Fed would finish tapering by mid-2022.
He said the FOMC’s standard of “substantial further progress” relative to December 2020 has been met for inflation and that “a lot of progress” has been made toward “maximum employment.
Beyond tapering, however, he said “liftoff” from the zero to 25 basis point target range for the funds rate is “well off down the road.” He said the FOMC will have “a strong, stringent test” for liftoff.
Williams warned against raising rates too soon, as he said has been done in the past. The objective should be to make the economy “as strong as possible” and to make sure it is on a “good trajectory” toward both “maximum employment” and average 2% inflation, he said.
Williams is looking for inflation to fall from current elevated levels, but not so far as to jeopardize the FOMC’s average 2% goal. He said inflation expectations are “well-aligned” with that objective.
In its Sept. 22 policy statement, the FOMC said, “Since (December 2020), 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.”
Williams did not diverge from that statement in prepared remarks: “I think it’s clear that we have made substantial further progress on achieving our inflation goal. There has also been very good progress toward maximum employment. Assuming the economy continues to improve as I anticipate, a moderation in the pace of asset purchases may soon be warranted.”
Elaborating in a media availability, Williams stopped short of calling for a November tapering announcement, but implied that it is likely.
He was reluctant to assert that “substantial further progress” has been achieved on both sides of the Fed’s dual mandate, but said, “clearly we’ve met that test for inflation ….”
“We’ve seen the labor market improve quite a bit,” he continued. “We’ve made a lot of progress there.”
But he added some qualifiers. “It’s just, from my perspective, do we feel comfortable that we’ve met that test because that’s what we set out, but also are we on the right trajectory going forward?”
“I actually feel pretty optimistic about that, but we’re going to collect some more data between now and our next meeting in November,” Williams continued. “Obviously, we’re going to see how the broad information that we’re getting … what it’s showing in terms of jobs, what it’s showing in terms of economic growth, how the economy is navigating the Delta variant wave, and come to that conclusion.”
“I do think we’ve made a lot of progress on the employment goal, and I feel positive about the outlook,” he reiterated.
Asked about his preferred pace for tapering, Williams responded, “Being done by the middle of next year is kind of a reasonable way to think about this.”
Williams was hopeful about avoiding the kind of “taper tantrum” the bond market experienced when former Fed Chairman Ben Bernanke hinted at a slackening of “quantitative easing” in 2013.
“Assuming economic conditions support the beginning of a taper soon, then there is a way to do this that would not disrupt markets at all and would be relatively smooth …,” he said. “I‘m not so worried that, assuming we start this process at a time when it makes sense from the economic outlook, … we can phase out the purchases over a reasonable amount of time…
“I’m not worried about that creating … any market function issues,” he said, adding it will be “just a natural shift in our policy stance from where it was before.”
Williams was less sure about when the FOMC will be able to raise the funds rate.
Noting that the FOMC has said “the stance of monetary policy will continue to support a strong and full economic recovery and sustained attainment of 2% average inflation” after asset purchases have ended, Williams said the FOMC has committed itself to hold the target range for the federal funds rate at its current level until the economy reaches conditions consistent with its assessments of maximum employment, and inflation has reached 2% and is on track to moderately exceed 2% for some time.”
“There is still a long way to go before reaching maximum employment, and over time it should become clearer whether we have reached 2% inflation on a sustained basis,” he added.
Asked about liftoff during the webinar, Williams made clear he’s in no hurry. In the last recovery, he said the Fed raised rates “too early,” thereby “preempting a full and strong recovery,” and preventing inflation from achieving the Fed’s 2% target.
This time, “we really want to focus on maximum employment” and “achieve a durable and strong recovery” that will provide “sustained average 2% inflation.”
As he has in the past, Williams made clear he does not favor a disproportionate reduction of agency mortgage backed securities. The Fed has been buying $40 billion per month of MBS and $80 billion per month of Treasuries, and he indicated he thinks that kind of mix should be maintained.
The combination of MBS and Treasury purchases “really work together to provide very accommodative financial conditions to support a strong, full recovery,” he said, adding that MBS purchases “may have a small extra effect reducing mortgage rates,” but were designed to work with Treasury purchases “to affect financial conditions more broadly.”
“These tools have been extremely effective …,” he went on, The Fed has been “using them to support a strong overall economy, not target individual sectors.”
Williams was cautiously upbeat about the economic outlook, but cited a greater than usual amount of uncertainty.
“The recovery continues to show solid momentum,” he said, but “we’ll need to be patient. Even with the strong pace of growth we experienced much of this year, a full recovery from the pandemic will take time to complete.”
Although non-farm payrolls have been increasing by 750,000 per month, he said, “the labor market recovery is being impaired by the recent COVID surge,” and he said the FOMC must take two factors into consideration.
“First, even if job postings are at a record high, job postings are not jobs,” he said. “These vacancies won’t be filled instantly .…”
“And second, a full recovery means a recovery in employment, not just lower unemployment,” he said.
Nevertheless, Williams was hopeful. “Progress on hiring remain strong, and I expect some pandemic-related factors to diminish as progress is made on containing the virus both here and abroad. Therefore, I am confident that we will continue to see meaningful job gains and continued progress toward maximum employment.”
As for inflation, Williams said he is “not seeing worrisome signs yet,” though he added he is “watching closely.”
He expects inflation to “come back down to around 2% next year.”
“One reason I expect inflation to moderate is that measures of underlying inflation and longer-term inflation expectations have been relatively stable during this period of otherwise volatile inflation readings …,” he said. “In terms of the level of inflation expectations, survey- and market-based measures of longer-term inflation expectations have reversed the declines of the past several years and are now around levels seen seven or eight years ago.”
Williams said “inflation expectations “currently appear to be well aligned with our 2 percent long-run inflation goal.”
“This evidence is reassuring that, despite the highly unusual swings in inflation over the past year and a half, inflation expectations are still well anchored,” he continued. “In addition, measures of underlying inflation that are not overly influenced by the effects of the pandemic have remained stable.”
Earlier, Chicago Fed President Charles Evans expressed a very different view of inflation and inflation expectations than Williams. Rather than seeing inflation expectations as preventing inflation from staying elevated, he saw them as potentially too low to ensure that inflation stays at 2% or higher.
Evans indicated he’ll most likely go along with a tapering move in November, but suggested he has grave doubts about whether it will be appropriate to raise the federal funds rate next year, as some of his colleagues have projected.
Evans, an FOMC voter, disputed the view of some Fed officials that inflation is now sustainably above 2%, and he urged the Fed to keep striving to overshoot the 2% average inflation target to lift inflation expectations rather than just hope that “accidental” forces like transitory supply constraints will keep inflation above 2%.
Evans said he thinks the “substantial further progress” standard for tapering is “close” to being met, but said the timing of liftoff is “much less clear.”
He said he is “more uneasy about us not generating enough inflation in 2023 and 2024 than the possibility that we will be living with too much.”
“For the balance sheet, I see the economy as being close to meeting the “substantial further progress” standard we laid out last December as the bar for beginning to taper our asset purchases,” Evans said. “If the flow of employment improvements continues, it seems likely that those conditions will be met soon and tapering can commence. ****
But Evans said “future decisions regarding the path of short-term policy rates seem much less clear to me at the moment.”
“If unemployment decreases in line with the SEP projections, I would view that as excellent progress and a very good outcome,” he said. “However, by itself, a low unemployment rate would not dictate a change in policy rates .…”