Fed To Cut Interest Rates, Resume Bond-Buying To Stimulate Growth (#GotBitcoin?)
President Trump on Friday repeated his call for the Federal Reserve to cut interest rates and said it should restart buying assets to stimulate growth. Fed To Cut Interest Rates, Resume Bond-Buying To Stimulate Growth (#GotBitcoin?)
‘In terms of quantitative tightening, it should absolutely now be quantitative easing.’
“In terms of quantitative tightening, it should absolutely now be quantitative easing,” he told reporters.
Fed officials bought trillions of dollars’ worth of Treasury and mortgage-backed securities in the aftermath of the recession. Now they are slowly unwinding those assets from their portfolio. They have said they plan to stop letting maturing assets roll off later this year.
Also Friday, White House economic adviser Lawrence Kudlow said Mr. Trump’s Fed nominees, Herman Cain and Stephen Moore, are “very capable people” who would offer a counterweight to other views on the Federal Reserve Board of governors.
“They will reflect those views to balance perhaps some of the other views on the Federal Reserve Board,” Mr. Kudlow said in an interview on Bloomberg Television.
Mr. Trump said Thursday he intends to nominate Mr. Cain, a former GOP presidential candidate and pizza restaurant executive, to a seat on the Fed’s Washington-based board. Mr. Trump has also said he intends to nominate Mr. Moore, a former adviser and CNN commentator, to a Fed spot.
Both Mr. Cain and Mr. Moore have criticized the Fed’s accommodative monetary policy after the recession. Both have also called for a return to the gold standard.
In recent weeks, Mr. Moore has aligned himself with Mr. Trump’s view that the Fed should stop its rate increases. The Fed raised rates four times last year, but officials have since signaled they intend to pause rate increases for the now.
Fed Sees Bond-Buying Programs As An Open-ended Effort
Minutes from December meeting show officials worrying about economic risks from surging virus cases, but hopeful about vaccines.
Federal Reserve officials last month broadly supported new plans to guide the steady growth of their $7.4 trillion asset portfolio, but they didn’t see a strong case to boost the economic stimulus the asset purchases provide.
Since June, the central bank has been buying $120 billion in Treasury and mortgage securities a month—initially to stabilize markets and later to support the economy by holding down long-term interest rates. Minutes of the Fed’s Dec. 15-16 policy meeting indicated officials saw a high bar for dialing up that support by increasing the amount or changing the composition of those purchases.
“Participants generally judged that the asset purchase program as structured was providing very significant policy accommodation,” according to the minutes, which were released Wednesday.
‘A number of participants saw risks to economic activity as more balanced than earlier.’
— From Fed minutes
The minutes also indicated that many officials were nervous about the potential for growth to stall in the winter amid a surge in Covid-19 cases and hospitalizations. But they also thought newly approved vaccines had reduced the chance of worse-than-anticipated economic outcomes later in 2021.
“A number of participants saw risks to economic activity as more balanced than earlier,” the minutes said.
For the first time since the pandemic reached the U.S. last March, officials at last month’s meeting discussed the possibility that economic growth could accelerate faster than expected. That scenario included wider-scale vaccinations releasing pent-up demand as social-distancing measures eased sooner than previously anticipated—which, in turn, could allow displaced workers to return to jobs sooner.
Still, the minutes showed officials were in no hurry to reduce their support for the economy. They expressed concern that permanent layoffs, as opposed to temporary furloughs, had been rising. Because it traditionally takes longer for workers who lose jobs permanently to find new ones, officials worried that better-than-expected economic growth wouldn’t necessarily yield equivalent improvements in labor-market conditions.
Besides of the grim public-health situation, officials cited concerns about several possibilities that were subsequently avoided in the weeks after the meeting. Those included the prospect that Congress wouldn’t agree on another virus-aid bill or that the U.K. and the European Union wouldn’t successfully conclude trade negotiations. Congress approved a $900 billion aid package later in December, and a new U.K.-EU trade deal was secured and came into force on Jan. 1.
Fed officials slashed their short-term interest rate to near zero in March as the coronavirus pandemic disrupted financial markets and the economy. They also launched an array of emergency lending programs and began large-scale purchases of government debt and mortgage securities.
At last month’s Fed meeting, officials updated their formal guidance around how long their asset purchases would continue, complementing a pledge in September that set a higher bar to raise interest rates.
The Fed has been buying $80 billion in Treasurys and $40 billion in mortgage bonds monthly since June. Until last month, the Fed had pledged to maintain those purchases “over coming months.” The central bank updated that guidance at the December meeting, stating the purchases would continue “until substantial further progress has been made” toward its broader employment and inflation goals.
This judgment would be “broad, qualitative and not based on specific numerical criteria or thresholds,” the minutes said.
The minutes also said all 17 Fed officials at the meeting supported the new guidance, which they believed “underscored the responsiveness of balance-sheet policy to unanticipated economic developments.”
Projections released last month showed most officials don’t expect to reach the central bank’s employment and inflation goals for years, leading them to hold interest rates near zero for at least three more years despite a somewhat more optimistic economic outlook.
The minutes said the new guidance reflected officials’ intentions to commit to a longer period of near-zero rates and a larger asset portfolio if it took more time for the economy to recover from the downturn.
The goal of the Fed’s new guidance is to avoid the kind of market backlash that occurred in 2013, when then-Chairman Ben Bernanke suggested the central bank might soon taper its asset purchases. Investors thought the Fed was accelerating its plans to raise interest rates, sparking a sudden one-percentage-point jump in the 10-year Treasury yield that became known as the “taper tantrum.”
At a news conference last month, Fed Chairman Jerome Powell said when the central bank is close to meeting its new benchmark of substantial progress, “we will say so, undoubtedly, well in advance of any time when we would actually consider gradually tapering the pace of purchases.”
Several officials thought that once the Fed decided to begin reducing the pace of its asset purchases, it could follow the same sequence that occurred in 2013; it slowly reduced the pace of purchases for around a year before phasing them out.
In the run-up to last month’s meeting, some investors focused on whether the Fed might change the composition of its holdings by buying more Treasury securities with longer-term yields to hold those yields down, as it did during bond-buying programs last decade.
The minutes showed only two officials were open to making such a change, though officials said they could consider those adjustments later.
Mr. Powell said last month the Fed didn’t think such charges were appropriate because long-term rates are already very low, boosting sectors of the economy such as housing. “Interest-sensitive parts of the economy, they’re performing well,” he said. “The parts that are not performing well are not struggling from high interest rates. They’re struggling from exposure to Covid.”
Fed’s Daly Sees Central Bank Maintaining Its Bond-Buying Pace Through 2021
The San Francisco Fed chief says that another round of fiscal aid from the government shouldn’t overheat the economy.
Federal Reserve Bank of San Francisco leader Mary Daly said the U.S. central bank is unlikely to pull back on its bond-buying stimulus this year, and that another round of government aid shouldn’t overheat the economy.
The official said she continues to expect the U.S. economy to pick up speed over the second half of the year, as vaccinations roll out and allow the economy to emerge from the shadows of the coronavirus pandemic. But even as the nation emerges from the crisis, it won’t yet be time for the central bank to pull back on its $120 billion a month in bond buying, she told The Wall Street Journal on Wednesday.
“For now, we have policy in a good place,” Ms. Daly said. “If you take the lens of my modal outlook, then it’s really continuing to purchase at the current pace through the end of this year.”
If the economy delivers the robust growth in the second half of the year that most central bankers expect, “then I can see the need to keep the current pace as not being as critical” starting some time next year, she said.
Ms. Daly was interviewed ahead of remarks by Federal Reserve Chairman Jerome Powell. The Fed leader also said he sees no reason for the central bank to pull back on aid for the economy, saying the asset purchases are “a key part of what we’re doing in providing overall accommodation to the economy…We’re not thinking about shrinking the balance sheet.”
Ms. Daly is a voting member of the rate-setting Federal Open Market Committee this year. At its meeting at the end of January, the central bank held its short-term interest-rate target at near zero and said it would press forward with the purchase of mortgage and Treasury bonds, in an effort designed to support financial-market functioning and keep real-world borrowing costs low.
In recent comments, other central bank officials have been hesitant to provide firm guidance about the path of bond buying, in an uncertain economy that they say needs Fed and broader government support.
Fed officials broadly agree actions by the rest of government have been critical in offsetting the impact of the pandemic. The Biden administration is working with Congress to pass another massive relief package, but some are worried that pumping more money into the economy when recovery seems nearer could cause problems and drive inflation up more than desired, in turn forcing the Fed to move away from the its ultra-easy policy.
Ms. Daly said the things now debated by Congress “are not things that are going to overheat our economy. These are things going to distressed people, distressed sectors, distressed businesses.”
The pandemic “is not over. And for us to say [more aid] is too much, I don’t know what metric and yardstick people are using; it’s certainly not looking out in their communities” and taking stock of the pain many Americans are feeling, Ms. Daly said.
The greatest risk is that we get nervous, and we pull back accommodation too quickly on the fears of rapidly rising inflation or on the overconfidence that inflation’s hit our target, and then we have more work to do to get it back up.
— San Francisco Fed President Mary Daly
The central banker welcomed data that showed market-based expectations of future inflation are on the rise, and she attributed a good part of that move up toward the Fed’s new inflation framework. Late last year, the central bank said it would allow inflation to overshoot its 2% target to make up for times where it has fallen short, in a bid to help deal with persistent weakness in price pressures.
“I am very happy” to see inflation expectations perking up, Ms. Daly said. “I view that as a data point of evidence that our framework is well understood by market participants,” she said.
Like many of her colleagues, Ms. Daly said she wouldn’t be surprised to see inflation pressures accelerate as the economy recovers, but she doesn’t expect that to endure. And that will pose a test for policy makers.
“The head fake I want to avoid is thinking that a few quarters of very rapid growth can be extrapolated to future quarters of very rapid growth. If that happens, fantastic,” Ms. Daly said.
“The greatest risk is that we get nervous, and we pull back accommodation too quickly on the fears of rapidly rising inflation or on the overconfidence that inflation’s hit our target, and then we have more work to do to get it back up,” Ms. Daly said.
Fed Should Start Tapering, But It Won’t
Policy makers need to quit kicking the can down the road and pare back their extraordinary measures.
I suspect that Federal Reserve officials are not the only ones looking for an uneventful policy meeting this week. The majority of market participants are also expecting an undramatic event that will include an upgrade of the economic outlook, a reiteration of uncertainties and the signaling of nothing new on policies.
Unfortunately, it’s an outcome that kicks the policy can further down the road when the central bank should be thinking now about scaling back its extraordinary measures.
Although Fed officials raised their growth estimates significantly at their last meeting, they will most likely upgrade their economic outlook for 2021 again after the recent string of strong economic data. This will be accompanied by the usual Covid-related qualifications when accelerating vaccine deployment continues to race against growing infections and the threat of new variants of the virus.
The further improvement in the economic outlook is unlikely to change the Fed’s policy guidance, however. Rather than follow the lead of the Bank of Canada, which last week began cutting back on bond purchases and signaled a quicker time frame for the next interest rate increase, the Fed will most likely take an approach similar to the one the European Central Bank conveyed last Thursday.
It will maintain policy as is, remind markets that it is willing to do even more should downside risks materialize and play down the risk of inflation and other overheating as transitory.
Markets have validated this policy attitude over the past month. After spiking to 1.76% in reaction to the improved economic outlook and inflation concerns, the yield on 10-year government bonds has declined, closing 20 basis points lower last week. Despite some small wobbles, risk-taking in the equity markets has remained robust.
And all this has come in the context of reassuring statements from top Fed officials – not just playing down the significance of the coming increase in inflation but also indicating that there is no need to worry about risks to financial stability.
Such a policy approach does have the attractiveness of repressing financial volatility at a time of economic, policy and institutional transitions. The Fed does not want to be a source of financial instability, especially when President Joe Biden’s administration faces challenges in Congress on its infrastructure proposal, the economy is picking up steam and the long-overdue handoff away from excessive reliance on monetary policy is materializing.
It is also an approach that papers over the growing inconsistency between ultra-loose financial conditions on the one hand and a strongly recovering economy, rising inflationary pressures and yet more evidence of pockets of excessive and, at times, irresponsible risk-taking on the other. The attractiveness of short-term calm comes at the risk of more significant policy challenges down the road.
Rather than do what it is most likely to do this week — that is, accompany the ECB in stoking ultra-loose financial conditions even though the U.S. economic outlook is brighter than Europe’s — the Fed should seriously consider following the Bank of Canada’s example by initiating a gradual and careful retreat. The longer it takes to do so, the harder it will be to pull off an eventual normalization without risking both significant market volatility and damaging what should and must be a durable and inclusive economic recovery.
Fed To Announce Bond Taper In Fourth Quarter, Economists Say
The Federal Reserve is expected to announce it will begin trimming its $120 billion in monthly asset purchases before the end of the year as the U.S. economy recovers strongly from Covid-19, according to economists surveyed by Bloomberg.
That’s a bit earlier than forecast in the March survey but leaves Fed asset purchases untouched for several more months, with the first interest-rate increase still not expected until 2023. In contrast, the Bank of Canada said last week it would scale back its purchases of government debt and accelerate the timetable for a possible rate increase, though the European Central Bank meeting on April 22 left its crisis-fighting tools unchanged.
In the survey, about 45% of the economists expect the Federal Open Market Committee to announce tapering in the fourth quarter with 14% seeing that happening in the preceding three months. The survey of 49 economists was conducted April 16-21. The result is a hawkish shift from March when slightly more viewed tapering as a 2022 event.
The FOMC concludes its two-day meeting on Wednesday and is expected to reaffirm plans to only adjust purchases once the U.S. economy achieves “substantial further progress” toward its employment and inflation goals. Nor is the Fed expected to raise the target of its benchmark rate from a zero to 0.25% range.
The FOMC policy statement will be released at 2 p.m. Washington time with Chair Jerome Powell holding a virtual press conference 30 minutes later.
Economists say they will scrutinize the statement language and press conference for hints of a potential tapering. Powell has said he’ll alert markets well in advance of that change when the committee views its goals in sight, and that a policy change will hinge on actual incoming economic reports, not just bullish forecasts.
“We think this is too early, given the insistence of the Fed to focus on ‘hard’ economic data and not expectations for improvement,” said Gero Jung, chief economist at Mirabaud Asset Management. “In our view, the Fed wants to see a sequence of very positive data — like the March jobs numbers — before starting to initiate a tapering process.”
Employers added a much-better-than-expected 916,000 new U.S. jobs last month.
What Bloomberg Economics Says…
“Our view is that the tapering happens in the first quarter of next year. This will give plenty of opportunity to pre-announce/forewarn/hint/etc. starting from the July semi-annual testimony, through Jackson Hole and over the course of the second half.”
— Carl Riccadonna, Chief U.S. Economist
More than two-thirds of the economists surveyed expect the FOMC will give an early-warning signal of tapering this year, with the largest number — 45% — looking for a nod during the July-September quarter. That could come from either the July or September FOMC meetings, or Powell’s semi-annual testimony to Congress.
Another option is the Kansas City Fed’s annual late-August Jackson Hole Economic Symposium, which has been used as a venue to deliver signals in the past. The Fed chair typically gives the keynote speech and Powell has so far continued that tradition.
Recent economic data have supported the Fed’s view of a robust rebound this year, with unemployment dropping and inflation expected to exceed 2% in 2021.
While the FOMC has been intentionally vague on how it will define “substantial further progress,” economists in the survey expect tapering to start when the unemployment rate is around 4.5% with inflation at 2.1%, measured by the personal consumption expenditures price index.
Yields on U.S. Treasuries have risen this year amid an outlook for an earlier taper, though Powell and other Fed officials have urged patience. In the minutes of the March FOMC meeting, the committee indicated it would take “some time” to achieve substantial progress.
Fed Seen Raising Rates In 2023 And 2024
The improved outlook will be underlined by the government’s report of first-quarter gross domestic product Thursday, expected to show a 6.8% increase, according to economists surveyed by Bloomberg.
“The Fed is turning increasingly bullish on the economy, but it still views any thoughts of hinting at a future tightening as premature,” economist Lynn Reaser of Point Loma Nazarene University said in a survey response.
Most economists expect the tapering of $80 billion in Treasuries and $40 billion in mortgage-backed securities purchases to last seven to 12 months.
Beyond the taper, the central bank is likely to be patient in actually raising rates from near zero. Interest rates aren’t likely to be raised until 2023, the economists say, which is nonetheless faster than the FOMC projected in March. Rates are likely to rise by 50 basis points to 0.75% by the end of 2023 and to 1.25% by the end of 2024, according to the median respondent in the survey.
“The Fed’s revised monetary policy framework, unveiled last summer, is significantly different from the past, where the Fed would tighten policy preemptively to head off inflation,” said Scott Brown, chief economist at Raymond James Financial Inc. The new framework means central bankers are instead looking for actual data.
Economists Say Risks To The U.S. Outlook Are Mostly To Overheating
Powell’s current term as Fed chair expires in February. Around three quarters of the economists expect Biden to keep him in the job, an overwhelming number that’s broadly unchanged from the March survey. Powell has deflected all questions on whether he’d serve four more years if asked, leaving the impression intact that he’d like to stay at the helm.
The strong economic momentum is lifting the outlook among economists, with nearly two thirds saying risks are to the upside. Some 26% view them as roughly balanced and 9% emphasize downside concerns. An accelerated U.S. vaccination program, fiscal stimulus and President Joe Biden’s $2.25 trillion infrastructure and jobs plan all create the risk of overheating, in the view of economists.
“The Fed could raise rates sooner than expected if a major infrastructure bill is passed,” said Joel Naroff, president of Naroff Economics. “That would secure solid growth well past the time the stimulus runs out and make it unnecessary to keep rates so low.”
The FOMC might consider a minor change to a technical rate, the interest on excess reserves, the minutes of the last meeting showed. About one fifth of the economists are looking for a change at the April meeting, which would move the rate up to 0.15% from 0.10%.
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