- ‘Substantial Further Progress Within Our Sight’; Timing Uncertain
- May Reach Substantial Further Progress Sooner Than She Thought In Jan.
- Wants More Clarity on Economy’s Path; Looking Toward Fall
- Taper Announcement Could Come ‘Late This Year’ Or Early 2022
- FOMC Will Be Talking About Mix of MBS vs. Treasury purchases
By Steven K. Beckner
(MaceNews) – San Francisco Federal Reserve Bank President Mary Daly said Tuesday the economy is getting closer to having made enough progress toward the Fed goals to discuss scaling back asset purchases, but indicated that actual “tapering” is still some ways off from her point of view – perhaps not until next year.
Daly, a voting member of the Fed’s policymaking Federal Open Market Committee, described herself as “bullish” about the economy, but said she is looking toward the Fall to accumulate enough data to gain greater “clarity” on the labor market and other aspects of the economy.
The FOMC will start “talking about” tapering at coming meetings, but “the mantra right now is steady as she goes, she told reporters following a webinar hosted by the Peterson Institute for International Economics.
She said the FOMC will be discussing whether or not to continue buying mortgage-backed securities in the same amount or proportion relative to Treasury securities in light of booming housing market conditions. While suggesting home buyers no longer need the Fed’s help on home financing, she said MBS purchases were a part of the Fed’s more general effort to influence the yield curve.
Daly is the second FOMC voter to echo Fed Chairman Jerome Powell’s signal last Wednesday that the FOMC will start discussing tapering of asset purchases at its next meeting. New York Fed President John Williams had done so Monday.
For now, the FOMC kept the federal funds rate in a zero to 25 basis point target range and reiterated plans to buy $120 billion of bonds per month “until substantial further progress has been made toward the Committee’s maximum employment and price stability goals.”
MaceNews asked Daly how much progress she thinks the economy has made toward that “substantial further progress” standard for tapering.
“When I think of the threshold of substantial further progress, I think we’re moving along in that direction, and I’m very optimistic that we’ll be getting there more quickly than I might have thought just in January before we knew exactly how quickly vaccinations would roll out and how much momentum people have for returning to a robust economy,” she began by replying.
“So I’m bullish on the recovery,” she continued. “I think we’re in good stead. Right now, we’re not there yet, but it is appropriate to start preparing for the time when we hit that threshold.”
She added that “’substantial further progress’ is within our line of sight.”
However, Daly went on to suggest she still sees no urgency about scaling back bond buying. “I think it’s possible we could even get there you know sometime late this year or early next year, but exactly what timing that looks like I don’t know.”
“And it’s also something the committee needs to talk about and decide,” she said. “It’s not a unilateral decision. I benefit completely from talking to my colleagues because we all look through different lenses and have different vantage points.”
Daly concluded by saying she agrees with Powell that “the time to start talking about these things has emerged, and that’s what we’ll be doing.”
Pressed on whether the FOMC will start by curtailing its $40 billion of monthly MBS purchases (relative to $80 billion in Treasury purchases), Daly hedged after making clear the composition of asset purchases will be part of FOMC discussions, but her comments could be interpreted as suggesting that reducing the share of MBS purchases might warrant priority.
Initially, she recalled the FOMC chose to do MBS purchases as part of its commitment to use all its tools to “accomplish the job (of recovery).”
“But as the job gets less difficult, less challenging, the hole is not as big as it was and we’re back on path to some extent, moving in the direction, it’s a good time to calibrate the tools that we’re bringing to our disposal and ask the question what are the portfolio of tools we have,” she added.
Daly said “MBS purchases were exceedingly important at making sure that the interest rate cuts we made at the beginning of the pandemic filtered through so that average Americans, not just Wall Street or other groups, average Americans got lower mortgage interest rates and could refinance their to get disposable income or purchase a home and support a robust recovery in the housing market….”
Now, she said “it’s appropriate to start talking about asset purchases, and when it would be appropriate to reduce their pace.”
Asked about the current housing boom or “bubble,” Daly said the Fed has achieved the goal of making sure the mortgage market was “functioning well,” and she said Fed MBS purchases are now having “a di minimis effect” on Americans’ ability to finance a home.
However, she said it’s important to think of the overall purpose of influencing rates “up and down the yield curve.”
As for hikes in the funds rate, she said that’s “not even on the table.”
In her prepared remarks on “climate change,” Daly said, “it’s incumbent on the Federal Reserve to understand the likely path of climate change and the transitions that could be part of this evolution.”
“At this juncture, when both the path of change and the eventual new equilibrium are so uncertain, our role is to listen, study, and adjust to whatever comes our way….,” she said. “Our future is uncertain: no one really knows the severity and scale of climate change, where and who will be most affected, or the nature, extent, and duration of our response to the risks. But one thing is certain—the economic ground is shifting, and we have a window of opportunity to prepare; to choose the degree of hardship we will endure.”
Daly contended that climate change can affect the Fed’s estimate of the neutral rate of interest (r*) which the Fed uses in calculating the appropriate setting of the short-term rates it controls.
For instance, “as uncertainty rises, so does the desire for precautionary savings that can be used to offset or hedge against possible future losses. While such behavior is a prudent response to greater risk, a change in saving behavior of a large number of individuals, both here and abroad, would contribute to a lower neutral rate of interest, or r-star.”
“A similar downward force on r-star may arise from a reduction in labor productivity, as rising temperatures impede outdoor work or skill demand outstrips skill supply, limiting growth,” she continued. “This would only add to the structural factors currently depressing the neutral rate of interest and further curtail the Fed’s ability to cut rates to combat economic downturns.”
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Contact this reporter: steve@macenewscom.
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