Federal Reserve Leaves Rates and QE Unchanged Says Inflation Risen Largely Reflecting Transitory Factors

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  • #26645
    Helmholtz Watson
    Participant

    The Federal Reserve kept rates unchanged at their…

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    #26646
    Helmholtz Watson
    Participant

    Comments from Powell in his opening statement July 28

    The labor market has a ways to go
    Household spending rising at an especially rapid pace
    Special factors appear to be weighing on labor force participation but those should wane in coming months
    Supply bottlenecks have been larger than anticipated
    Inflation still expected to fall back to longer run goals
    Housing remains strong and business investment rising at a solid pace
    Inflation could turn out to be higher and more persistent than we expect
    If we saw signs of material and consistent rises in medium-term inflation beyond target, we would respond
    The timing of any taper will depend on incoming data and we will provide advance notice before any changes

    #26647
    Helmholtz Watson
    Participant

    Powell in the Q&A:

    Still ‘some ground to cover’ before substantial further progress achieved
    It is clear inflation will be running at 2% for the months ahead
    Repeats ‘some ground to cover’
    We’re clearly ‘a ways away’ from raising interest rates; it’s not on our radar now
    Says he has ‘some confidence’ that medium term inflation will fall back
    Bond moves might be related to delta. Also cites technical factors and fall in expected inflation compensation
    We’re clearly on the path to a very strong labor market
    It’s unusual to have such a high rate of vacancies to workers
    There may be a speed limit with people finding new jobs, it takes time; it’s about job selection
    Suspects impacts of delta wave will be less but we will have to wait and see
    Delta could slow the economy down for a period of months or not

    #26744
    ClemSnide
    Participant

    Eric Rosengren president of the Federal Reserve Bank of Boston says the central bank should soon begin to dial back its extraordinary aid for an economy that is strongly recovering from the pandemic recession.

    In an interview with The Associated Press that the central bank should announce in September that it will begin reducing its $120 billion in purchases of Treasury and mortgage bonds “this fall.” The bond buying, which the Fed initiated after the coronavirus erupted in March of last year, has been intended to lower longer-term interest rates and encourage borrowing and spending.

    Rosengren also echoed some of the Fed’s recent critics by arguing that the bond purchases are no longer helping to create jobs but are instead mostly helping drive up the prices of interest-rate sensitive goods such as homes and cars. Home prices are rising at the fastest pace in nearly 20 years.

    With inflation surging in recent months, the Fed has come under criticism from Republican members of Congress for continuing the bond purchases while also keeping its benchmark short-term interest rate pinned near zero. Last week, a Democratic senator, Joe Manchin of West Virginia, echoed that concern, urging Chair Jerome Powell to start tapering the bond buys.

    Rosengren’s suggested timetable for tapering is faster than most economists expect Powell to follow based on Powell’s recent remarks that the job market needs to show further improvement. But like Rosengren, a number of other Fed policymakers have expressed support for a faster reduction in bond purchases. They include Christopher Waller, who serves on the Fed’s influential board in Washington, and James Bullard, president of the Federal Reserve Bank of St. Louis.

    Other officials, though, have expressed a preference for a slower timetable, similar to what Powell has suggested. Fed Governor Lael Brainard, for example, said late last month that she wants to see jobs and inflation data for the month of September to gauge how much progress the economy has made. That data won’t be available until October.

    “There is clearly a gap opening up at the Fed,” said Neil Dutta, an economist at Renaissance Macro Research.

    Vice Chair Richard Clarida said last week that the economy’s rapid recovery would likely mean the Fed could start lifting its benchmark interest rate in early 2023. Dutta noted, however, that Clarida’s term on the Fed’s board will end in January.

    Late last month, Powell said at a news conference that Fed officials would discuss tapering its bond purchases at upcoming “meetings,” which would include September, foreclosing the possibility of an announcement that month, Dutta said.

    Fed officials have said the economy needs to make “substantial further progress” toward its goals of maximum employment and annual inflation at modestly above 2% before the central bank will begin to pare its bond purchases. Rosengren said that he believed that this criteria had already been met with inflation, which has surged above 2% since this spring, and was close to being fulfilled in regard to jobs.

    According to the Fed’s preferred measure, inflation reached 4% in June compared with a year ago. Excluding volatile food and energy prices, it was 3.5%, the fastest year-over-year growth since 1991.

    “I would expect if we continue to have (jobs) reports like we’ve had over the last two, with very substantial payroll employment gains, that by the September meeting, we would, in my view, meet the substantial further progress criteria, and that would imply starting to taper sometime this fall,” Rosengren said.

    The economy added a robust 943,000 jobs in July, the government reported Friday, and the unemployment rate fell last month to 5.4%, from 5.9%. That followed a similarly strong report for June.

    Rosengren said that while he agreed with Powell that current inflation levels were mostly driven by temporary factors related to supply shortages, such as spikes in used car prices, other factors such as rising wages were likely to persist and keep inflation at least slightly above 2% through next year.

    “I welcome the fact that we’re seeing higher wages,” Rosengren said. “That’s good for greater economic equality. … We do want to see sustained increases in wages to make sure that we have sustained increases in prices.”

    Powell and some other Fed officials, including Presidents Mary Daly of the San Francisco Fed and Neel Kashkari of the Minneapolis Fed, have said they remain focused on making more progress in reducing unemployment before pulling back on the Fed’s stimulus efforts. Even after last week’s jobs report, the economy still has 5.7 million fewer jobs than before the pandemic.

    Yet Rosengren suggested that the bond purchases, which are intended to boost consumer and business spending and spur demand for workers, are less effective when demand for labor is already strong and is being held back by disrupted supply chains. Many of the unemployed have concerns about contracting the virus at a job or have children to care for. Some have been receiving a soon-to-expire $300-a-week federal unemployment supplement or have been holding out for higher pay.

    “If you continue to purchase assets, the reaction primarily is in pricing, not so much in employment,” the Boston Fed president said. “I don’t think asset purchases are having the desired impact on really promoting employment.”

    Home prices are soaring, yet just 8,300 jobs were added in residential construction last month, Rosengren noted. Fewer than 1,000 jobs were added in auto manufacturing. Nearly all the 943,000 jobs added were outside those two interest-rate sensitive sectors that Fed policies are intended to bolster.

    https://apnews.com/article/business-health-coronavirus-pandemic-economy-b7766deeda2afcbecf427ca7e2658adf

    #26841
    Helmholtz Watson
    Participant

    Feds Kaplan on Fox Business

    The big “imponderable” is path of Delta virus.
    So far the Delta virus has not had a material effect on mobility
    Delta virus is limiting production output and slowing return to office
    will be watching it Delta carefully
    if Delta is having a more negative effect on GDP growth could cause me to adjust my views
    a big economic variable is how quickly to get people vaccinated; right now in a negative trend as far as spread of Delta virus

    #26985
    Helmholtz Watson
    Participant

    NY Fed President Williams: It could be appropriate to start taper this year

    Assuming the economy continues to improve as anticipated, ti could be appropriate to st art reducing the pace of asset purchases this year
    Even after the asset purchases end, the stance of monetary policy will continue to support recovery
    Wants to see more improvement in labor market before he is ready to say substantial further progress standard has been met
    There are indications that the spread of the delta variant is weighing on consumer spending and jobs
    Expects real GDP to increase by around 6% this year
    Expects inflation to come back down to 2% next year
    Pace of growth appears to be slowing somewhat relative to the first half
    We have a long way to go to get back to maximum employment
    it’s clear that this spike in inflation largely reflects the transitory effects of the rapid reopening of the economy, which is pushing supply and demand in extreme ways.

    #27009
    Helmholtz Watson
    Participant

    Fed’s Mester: Would like to begin tapering asset purchases this year

    She would still like to begin tapering asset purchases some time this year despite weak August jobs report
    Would be comfortable with winding down asset purchases over the first half of 2022
    Delta variant is a risk to the outlook but not necessarily going to weigh heavily on economic activity
    Expects employment to continue to rise over the rest of this year
    Looks at labor force participation, employment population ratio, unemployment rate and racial and gender gaps when evaluating labor market
    Some more people will join the labor market has issues with childcare are resolved and some people train for new jobs
    She wouldn’t have a problem with Fed reviewing rules on how officials should handle investments

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