[Helmholtz Watson]

The Federal Reserve kept rates unchanged at their December meeting, The QE Taper doubled in pace of Treasuries $20B per month as expected, and MBS $10
[See the full post at: Federal Reserve Leaves Rates Unchanged, Doubles Taper To $30 Billion per Month as Expected]

[Helmholtz Watson]

Powell opening statement:

Demand remains very strong, buoyed by healthy household balance sheets
We still see rapid economic growth
Recent improvement in labor market has narrowed difference across classes and races
We think labor market will continue to improve
The pandemic has pushed people out of the labor market, unclear when they will return
Bottlenecks have been longer and stronger than anticipated
Inflation likely to run above 2% goal “well into next year”
Price increases have broadened
Wages have also risen briskly
We expect inflation to fall close to our goal next year
We will watch carefully to see if economy is moving in line with expectations

[Helmholtz Watson]

Fed’s Mester Wall Street Journal interview

Mester is a voting member on the FOMC this year

Case is very compelling that the Fed removes accommodation
If we can get beyond the pandemic, we’ll see inflation measures, back down
There are many things pushing up inflation now including supply chain issues and wages
We’ve moved from pandemic driven inflation to something broader
It is incumbent on the Fed doing what it needs to do to move off extraordinary combination
Depending on what happens with the economy some of the rate increases further out may need to be moved forward
The case is very compelling that we remove accommodation
Fed is also considering what it can do to balance sheet to bring level of assets down
If things look like they do today in March she would support lifting rates from zero at that point
Because of demographics, labor force participation trend is downward and we are back to that trend
Fed will have to take policy actions to make sure inflation expectations remain consistent with 2% goal
The economy is basically back to full employment and above inflation target
Effects the balance sheet reduction will depend on where the economy is in the moment
Fed has to be cautious and humble about putting a number on the effects of balance sheet reductions
Fed has to set an appropriate path for the balance sheet and then see what the effects are
Reducing the balance sheet and raising interest rates both remove accommodation but not yet be tightening monetary policy
Personally, believes that reducing the balance sheet at a faster pace because the economy is in a stronger place and balance sheet is at a higher place
Fed to reduce balance sheet is fast they can without disrupting the financial markets
One strategy Fed could use his selling assets, doesn’t want to take anything off the table
Even without active selling there is going to be a reduction in balance sheet because of the maturity of holdings
She would like to look at larger redemption as balance sheet is reduced
The Fed has yet to decide on a plan for balance sheet reduction
Still wants to be communicative and transparent, but the pandemic is requiring Fed officials to be more nimble
There is no sense that Fed wants to surprise anyone with its policies
Mester has been more hawkish and is certainly looking to get on with taking back accommodation sooner rather than later.

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