Clarida Lines Up With Powell on Tapering This Year: Fed Update
Bostic Favors Quick Taper, Sees First Hike End 2022: Fed Update
(Bloomberg) -- Federal Reserve Vice Chair Richard Clarida said he favors starting to scale back the central bank’s monthly bond purchases later this year if robust job gains continue.
Clarida’s comments, in a CNBC television interview, echoed remarks from Fed Chair Jerome Powell during his address to the U.S. central bank’s annual Jackson Hole policy forum on Friday.
In his speech, Powell said the Fed could begin slowing its asset purchases this year, though it won’t be in a hurry to begin raising interest rates thereafter. The Fed chair didn’t provide a specific timeline for tapering, however. He also sounded a note of caution about employment levels and stuck to the central bank’s message that the current bout of inflation is likely to be transitory.
Stocks rose after Powell spoke, while the dollar and Treasury yields fell.
The conference, hosted by the Kansas City Fed and traditionally held in Jackson Hole, Wyoming, with the peaks of the Teton mountain range providing a laid-back atmosphere for the usually buttoned-up crowd, is being held virtually for the second straight year as coronavirus infections surge around the country. Only Powell’s speech was made public, with the rest of the virtual panels restricted to invitees.
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Fed’s Waller Sees Inflation More Persistent Now Than in May (3:45 p.m. ET)
While the Fed sees inflation cooling off in the months ahead, factors such as supply-chain bottlenecks, wage pressure and businesses passing on costs to consumers will keep prices running higher than previously thought, according to Fed Governor Christopher Waller.
“It’s going to be more persistent than what I may have thought back in May,” Waller said in an interview with Yahoo Finance.
Waller said that one more good jobs report would open the door to the central bank tapering its bond-buying program, which he prefers to lead with mortgage-backed securities.
For tapering to start, Waller said the Fed would want to see “substantial further progress,” or about 85% of jobs lost to the pandemic recovered. Raising interest rates would signal it has achieved its dual mandate, with closer to all positions lost coming back.
Waller expressed concern about the “eye-popping” price increases in the housing market, which he partly attributed to millennials buying their first homes in the era of remote work. Since a notable percentage of the purchases have been in all cash, he said it’s not a stress on the banking system and doesn’t represent financial excess.
Blame Inequality for Low Natural Interest Rates: Jackson Hole Paper (3:15 p.m. ET)
Rising income inequality over the past four decades has played a much bigger role in lowering the natural rate of interest in the U.S. than demographic factors like the aging baby boomer population, according to a paper by economists Atif Mian, Ludwig Straub and Amir Sufi presented at the Federal Reserve’s annual Jackson Hole policy conference.
Previous theories on the decline in so-called r-star, the rate of interest that neither speeds up nor slows down growth, have argued that the aging of the large baby boomer cohort, those born between 1946 and 1964, and the tendency for older people to have higher savings rates, was keeping interest rates low. The new paper finds that increased savings since the 1980s has mostly been concentrated among the top 10% of income earners, who have steadily seen earnings increases disproportionate to the bottom 90%. Looking across the distribution of working age Americans, savings rates vary far less.
“The rise in savings by high-income households is likely a powerful force putting downward pressure on r-star,” the economists wrote.
Looking at a period of 1950 to 2019, the economists found that the income share of the top 10% of earners within the same birth cohort in 2019 was nearly 15 percentage points higher than the top 10% before the 1980s.
The natural rate of interest as measured by the widely-cited Laubach-Williams model has declined to 0.03% from 5.7% in 1961.
‘Imperative’ to Look Beyond Jobless Rate: Jackson Hole Paper (2:30 p.m. ET)
Policy makers need to look beyond the U.S. unemployment rate to get a reading on its full employment goal as growth in the labor force is likely to take longer, according to a paper presented at the Federal Reserve’s Jackson Hole symposium.
“The participation cycle is likely to lag the recovery in the unemployment rate in coming years, just like it did in previous recoveries,” Arizona State University economist Bart Hobijn, a visiting fellow at the San Francisco Fed, and Aysegul Sahin, a University of Texas at Austin economist, wrote in the paper. The authors conclude it’s “imperative” that the Fed consider a broader range of labor-market indicators in assessing full employment.
The focus on labor-force participation, which takes time to improve, rather than the unemployment rate would suggest a slower move to raise interest rates in the future. In its policy statements, the Federal Open Market Committee has indicated it will raise rates only when conditions are consistent with “maximum employment.”
Clarida Lines Up With Powell on 2021 Taper (2:00 p.m. ET)
“We did set out a test for slowing the pace of our purchases in December, we wanted to see that substantial further progress towards our mandate,” Federal Reserve Vice Chair Richard Clarida said in a CNBC television interview. “We’ve certainly met that standard with regards to inflation. We’ve made progress on the labor market.”
He noted that in July officials decided that the labor market had more gains to make before meeting the guidance.
“But we’ve had 800,000 jobs for the last three months and so I expect that those gains will continue in the fall and if that happens I will also support commencing reduction in the pace of our purchases later this year,” he said.
He spoke after Chair Jerome Powell told the central bank’s annual Jackson Hole policy forum that it could begin reducing its $120 billion monthly bond purchases this year, though it won’t be in a hurry to begin raising interest rates thereafter.
Analysts took Powell’s remarks as a clear step towards tapering.
“We continue to believe that the FOMC’s intention is to provide advance notice in September and formally announce the start of tapering in November,” Goldman Sachs Group Inc. economists said in a note to clients, referring to the Federal Open Market Committee, which next meets Sept. 21-22.
Clarida’s term as a Fed governor expires Jan. 31 and there is no indication so far from the White House that President Joe Biden is considering keeping him at the Fed once his time is up.
Mester Says She Would Like Taper to End by Mid 2022 (1:30 p.m. ET)
The Fed has met its criteria for tapering asset purchases as it relates to inflation, while the employment target isn’t far behind, Cleveland Fed President Loretta Mester said in the interview.
“We’ve met the criteria, we’re very close to it,” Mester said. “It’s time to step back from some of that extraordinary accommodative policy that we put on, in particular the asset purchases.”
Once the Fed is done phasing out the purchases, it will have time to assess data on how the economy is doing before making any decisions on interest-rate increases, Mester said.
Changes to interest rates are “longer down the road and off the topic for today,” she said.
Mester added that the central bank should communicate its tapering intentions appropriately so that it doesn’t surprise the markets.
Click here to listen to Mester’s interview on Bloomberg Television
St. Louis Fed’s Bullard Argues for ‘Relatively Rapid’ Taper Pace (11:30 a.m. ET)
St. Louis Fed President James Bullard called for a “relatively rapid” pace of tapering and said the benign market reaction to Powell’s Jackson Hole speech earlier on Friday shows the U.S. central bank is in good shape to start scaling back its $120 billion-a-month asset purchases.
“We could go relatively rapidly,” he told Fox Business television in an interview. “You could go taper at a pace of $20 billion per month on Treasuries, $10 billion per month on mortgage-backed securities. I think most of this taper is already priced into markets. You saw today in reaction to the speech, equities actually went up.”
Bullard also praised Powell for preparing markets for the taper decision.
“The chair has done a good job here in bringing this discussion out into the open, in July and August here, and I think we’re in great shape to just go ahead at this point,” he said.
Two-Speed Global Recovery to Raise Rate Pressure: Jackson Hole Paper (11:15 a.m. ET)
Emerging markets could be significantly hurt next year by a two-speed global economic recovery that sees them lagging behind advanced economies while it meaningfully pushes up interest rates, according to a paper to be presented to the Jackson Hole Economic Policy Symposium.
University of California, Berkeley, professor Pierre-Olivier Gourinchas and his co-authors advise policy makers in developed nations to pivot away from expansionary budgetary policies that tend to boost rates and to avoid any early tightening of monetary policy.
In an in-depth look at fiscal policies in 27 countries, the paper concluded that most of the aid doled out to small- and medium-sized enterprises during the pandemic went to businesses that did not need it, though it did limit firm failures. The researchers also saw little evidence that the support kept “zombie” companies alive and predicted that business closures would only rise slightly as the aid is withdrawn.
“Our conclusion is that fiscal support in 2020 achieved important macroeconomic results, despite the poor targeting,” Gourinchas and his co-authors wrote in the paper, entitled “Fiscal Policy in the Age of Covid: Does it ‘Get in all of the Cracks?’”
‘Fed Up’ Activists Urge Powell to Keep Supporting Economy Until Maximum Employment
Activists with organizations from Maine to New Mexico gathered on a webinar Friday morning to demand the Fed resist withdrawing support for the economy before reaching maximum employment and sustained rising wages, especially in working-class and minority communities.
The Fed’s decision to raise interest rates in 2015 was a mistake, said Benjamin Dulchin, director of the “Fed Up” campaign, organized by the Center of Popular Democracy.
The policy has resulted in a rise in long-term unemployment for Black and Hispanic communities, who are often “last hired,” said Ree Chavez, a campaign leader in New Mexico, where she runs a Facebook group for the unemployed that numbers in the thousands.
Wages have stagnated for years among working-class households, and families working full-time on minimum wage are struggling to make ends meet, said Apryl Lewis, an organizer in North Carolina.
Powell has made serious progress on acknowledging the impact of Fed policies on working-class and minority communities, said Dulchin. But it’s not enough, he said.
“Powell’s speech wasn’t specific enough about how the Fed will keep his policies going long-term until the economy gets to where it really should be with the right policies in place, not just back to where it was with the wrong policies,” Dulchin said in a statement.
Easy Policy Can Help Economy Adjust to Covid: Jackson Hole Paper (10:30 a.m. ET)
Expansionary monetary policy can help smooth an economy’s adjustment to shocks like Covid-19, according to a paper presented at this year’s Jackson Hole conference.
“A desire to facilitate the reallocation process can lead to favor a more expansionary monetary policy,” said the paper’s author -- Veronica Guerrieri of the University of Chicago, Guido Lorenzoni of Northwestern University, Ludwig Straub of Harvard University and Ivan Werning of the Massachusetts Institute of Technology.
Guerrieri and her co-authors contrast that with the idea that “excessively easy monetary policy may hamper the reallocation process” -- for instance, between two sectors like service-providing and goods-producing industries -- because “some businesses and some jobs that get destroyed in a recession are not going to be viable even after the recession is over,” they said.
“By stimulating demand in the aggregate, monetary policy ends up stimulating activity also in those sectors, possibly slowing down the reallocation process,” the authors wrote.
That argument doesn’t take into account that inflation in a supply-constrained sector toward which reallocation is occurring, supported by easy monetary policies that boost aggregate demand, will help boost wages in that sector. That, in turn, will incentivize more workers to take jobs there, helping to resolve the imbalance, the authors said.
“Higher inflation can facilitate the adjustment of relative wages, so as to provide the right price signals to encourage mobility,” they wrote.
Powell Says Taper Could Start in 2021, With No Rush on Rate Hike (10 a.m. ET)
In his prepared text of the speech, Powell said the central bank could begin reducing its monthly bond purchases this year, though it won’t be in a hurry to begin raising interest rates thereafter.
The economy has now met the test of “substantial further progress” toward the Fed’s inflation objective that Powell and his colleagues said would be a precondition for tapering the bond purchases, while the labor market has also made “clear progress,” the Fed chief said in the remarks.
At the Fed’s most recent policy meeting in late July, “I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year,” Powell said.
“The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the delta variant,” he said. “We will be carefully assessing incoming data and the evolving risks.”
Bullard Says Continued Bond Buying May Do More Harm Than Good (9:30 a.m. ET)
St. Louis President James Bullard said continued bond buying by the central bank may be doing more harm than good.
“I would like to taper now and get it finished by the first quarter” of 2022, Bullard said in interview with Bloomberg Television.
Finishing bond purchases would give the Fed the option of raising interest rates in 2022 to put downward pressure on inflation, if that’s needed, he said.
Bullard added that, “at some level” financial markets have already priced in a reduction in bond purchases, reducing the risk of a negative reaction from investors.
Harker Says Delta Variant ‘Clearly a Problem’
People are still concerned about health risks, preventing them from returning to work; highly accommodative policy isn’t going to solve this problem, Philadelphia Fed President Patrick Harker said in an interview with Bloomberg TV.
The delta variant is “clearly a problem,” Harker said, and the way to get the pandemic under control is to get people vaccinated.
Harker said he wants to start the taper process sooner rather than later, and keep it as simple as possible, and after that think about raising interest rates.
“We’re not there yet,” he said.
Kaplan Says Taper Process Should be Done in 8 Months (9:30 a.m. ET)
Tapering should start “as soon as possible,” Kaplan said in the interview.
Kaplan said he’d prefer a gradual tapering of asset purchases, over an eight month period, and that starting the process soon could give the Fed more flexibility when it comes to making interest-rate decisions.
Imbalances in the labor market, with some businesses needing to raise wages to attract the workers they need, may feed into persistently higher inflation, Kaplan said.
Mester Favors Starting Bond Tapering Sometime This Year (9 a.m. ET)
Federal Reserve Bank of Cleveland President Loretta Mester said the U.S. economy has met the Federal Open Market Committee’s guidance for beginning to taper bond purchases.
“I’m comfortable that we’re basically there,” Mester says Friday in an interview on CNBC television. “We’ve certainly made substantial further progress since December.”
Mester said she favors beginning to reduce monthly bond purchases sometime this year, and ending the purchases in the middle of 2022.
The delta variant of Covid-19 is not altering the outlook for businesses in her district, Mester said.
U.S. Personal Spending Growth Moderates, While Price Index Rises
As investors await Powell’s speech, a key economic data report was released Friday. U.S. personal spending growth moderated in July, reflecting a drop in purchases of goods, while a closely watched measure of inflation remained elevated.
Members of the Fed and other policy makers have been debating whether the recent pickup in inflation is transitory -- related to the reopening of the economy and supply constraints -- or a more permanent trend.
The report shows personal incomes rose more than forecast, reflecting the distribution of advance child tax credit payments and more compensation.
Bostic Says ‘Let the Economy Stand on Its Own’ (8:30 a.m. ET)
“We should be trying to get our policies back into a more normal situation,” Bostic said in a Bloomberg TV interview with Michael McKee. “We have been at a very extreme level of accommodation” and “the economy calls for us to pull off of that a little bit and let the economy stand on its own.”
Bostic said the Fed has met its goal needed to taper regarding inflation, and could meet the labor market side of the equation soon.
The Fed will be able to taper asset purchases faster than the last time it pulled back on the stimulus, following the financial crisis, amid a strong economy, Bostic said in the interview.
An announcement of tapering shouldn’t incite a strong market reaction, Bostic said. He also repeated that he sees the central bank raising interest at the end of 2022.
Bostic Favors Quick Taper, Sees First Hike End 2022 (7:30 a.m. ET)
“My view would be, let’s start the taper let’s let’s do it quickly, let’s not have this linger,” Bostic said in the CNBC interview.
Bostic’s comments were similar on timing to views expressed in early August, when he said he could see a move following another month or two of big gains of jobs.
In the interview, Bostic also said he sees a lot of “episodic aspects” to the inflation dynamic. From conversations with business leaders, they anticipate inflation may go well into 2022, longer than people expected, Bostic said.
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