Clarida Doesn’t See the Fed Paring Asset Purchases in 2021

(Bloomberg) -- Federal Reserve Vice Chair Richard Clarida said he doesn’t expect the central bank to begin tapering its asset purchases this year despite an expected strengthening of the economy as the pandemic fades.

“My economic outlook is consistent with us keeping the current pace of purchases throughout the remainder of the year,” he said Friday during a virtual discussion hosted by the Council on Foreign Relations.

A few policy makers, including Chicago Fed President Charles Evans and Atlanta’s Raphael Bostic, said this week they might support reducing the pace of buying by year-end if the economy bounces back strongly enough.

Clarida allowed that his expectation for purchases could change if the economic outlook improved more than anticipated. But he also said that the economy is in a “deep hole” and that it would take time for the jobs market to heal and inflation to rise toward the Fed’s 2% goal.

“It could be quite some time before we would think about tapering the pace of our purchases,” he said.

The Fed is buying $120 billion of U.S. Treasury and agency mortgage-backed securities each month as part of its efforts to support the economy.

The rate-setting Federal Open Market Committee said in December it would keep buying at least at the current pace until the economic recovery had made “substantial further progress.” It has not spelled out what that means.

Outlook Brighter

In his opening remarks, Clarida said the economy’s future looks brighter thanks to the approval of Covid-19 vaccines, despite a jump in infections.

“The development of several effective vaccines indicates to me that the prospects for the economy in 2021 and beyond have brightened and the downside risk to the outlook has diminished,” he said.

Although the current case surge is “cause for concern,” Clarida also said the economy has proved more resilient in adapting to the pandemic than many inside and outside the Fed had expected -- thanks in part to monetary and fiscal support.

The economy has hit a soft patch as infections have risen. Nonfarm payrolls decreased by 140,000 in December, the first decline in eight months, as soaring cases exacted a bigger toll on jobs, particularly at restaurants.

Clarida called the jobs report “disappointing,” although he suggested that the labor market was not as weak as the headline number indicated and that the softness was unlikely to last long.

Retail, professional and business services, construction and manufacturing all posted solid job gains in December even as payrolls at restaurants and bars plunged.

Clarida brushed aside worries the the recent rise in long-term interest rates would undermine the Fed’s efforts to return the economy to maximum employment and lift inflation to the central bank’s objective.

U.S. 10-year Treasury yields climbed above 1% Wednesday for the first time since March and have stayed above that threshold since then.

Clarida said he’s “not concerned with a 10-year Treasury yield a touch above 1%.” If yields rise on increased optimism about the economy, “that is not something that troubles me,” he added.

He saw no need for the Fed to adjust asset purchases to keep yields down by buying more longer-dated securities.

“I myself would have no inclination or think there’s any need to think in the near term about adjusting the duration of the maturity of our purchases,” he said.

Clarida also played down concern that the Fed’s ultra-easy monetary policy was setting the stage for an outbreak of unwanted inflation or a bubble in financial markets.

While inflation will rise in the coming months, much of that will prove temporary and it will still finish the year below the Fed’s target, he said.

No Bubble

As for the elevated stock market, Clarida said it is reflecting a variety of factors, including low interest rates and expectations of faster economic growth as more people are vaccinated.

“It’s not something that sitting here today is a particular concern,” he said of a potential equity market bubble.

Stock prices have surged to record levels this week even as virus infections have risen and mobs stormed Congress seeking to overturn President Donald Trump’s November defeat.

Clarida was also relaxed about the dollar’s decline in recent months.

“What you basically see with broad measures of the dollar is that its level now is just a bit below its average level over the last five years,” he said in response to a question. ”Broadly speaking, the dollar is more or less in a range that it’s been in for the last five years and it’s not something that causes me any concern right now.”

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