Fed’s Powell says it’s not yet time to consider shrinking emergency asset purchases

jerome powell
Federal Reserve Chairman Jerome Powell.

  • It’s “not yet” time for the Fed to even consider pulling back its policy support, Chair Powell said.
  • Fed policymakers ruled to hold interest rates at historic lows and maintain its asset purchases.
  • The recovery is “highly uncertain” and the economy is far from hitting the Fed’s goals, Powell said.
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The Federal Reserve expects a strong economic recovery through 2021, but it still aims to maintain ultra-easy financing conditions well into the future.

Members of the Federal Open Market Committee ruled on Wednesday to hold interest rates at historic lows following the conclusion of its two-day meeting. The central bank will also maintain its pace of purchasing at least $80 billion in Treasurys and $40 billion in mortgage-backed securities each month, according to a press release.

Buying such assets accommodates smooth market functioning and thereby supports “the flow of credit to households and businesses,” the Fed said in a statement.

Yet investors and economists alike have looked to Fed officials in recent weeks for any hints at when the central bank will taper its purchases. An unexpected withdrawal from the Fed could spark a sell-off in Treasurys, rapidly lift yields, and prematurely raise borrowing costs while the economy is still rebounding.

Policymakers’ newly improved projections for growth and employment place new pressure on the central bank to tighten monetary policy. Still, it’s “not yet” time to even consider tapering due to lasting risks to the economic outlook, Powell said during a press conference.

Concerns of a rate hike coming earlier than the Fed’s signaling also overlook the lasting risks to the US recovery, the central bank chief added.

“The state of the economy in two to three years is highly uncertain and I wouldn’t want to focus too much on the timing of potential rate increase that far into the future,” Powell said.

Staying on target for inflation and maximum employment

The statement underpins previous commentary from the Fed emphasizing it will patiently wait to reach its goals of above-2% inflation and maximum employment. Economic reopening and stimulus might drive a sudden rise in inflation, but the increase isn’t likely to be permanent, Powell said.

Inflation would then need to steadily trend above 2% before the Fed fully retracts its policy support, he added.

Reaching maximum employment is set to be a similarly lengthy process. While Fed officials now see the unemployment rate falling to 4.5% in 2021, the central bank is also tracking wage growth and labor force participation to determine the labor market’s health.

“No matter how well the economy performs, unemployment will take quite a time to go down and so will participation,” Powell said. “The faster the better. we’d love to see it come sooner rather than later.”

Maintaining loose monetary policy for such a long period marks a paradigm shift for the central bank. Decades-old tenets of economic theory held that unemployment could only drop so much before lifting inflation.

That dynamic is antiquated, at least according to the Fed chair. The previous expansion showed that, even with unemployment below 4% and inflation trending below 2%, hiring and wage growth could improve in historically underserved communities. Failing to give those groups a shot at a robust recovery would set the country back as it emerges from the pandemic, Powell said.

“There was a time when there was a tight connection between unemployment and inflation. That time is long gone,” he said. “We had low unemployment in 2018 and 2019 and the beginning of ’20 without having troubling inflation at all.”

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Monetary stimulus will remain in place well into economic recovery, Fed Chair Powell says

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  • Federal Reserve Chairman Jerome Powell reiterated Thursday that the central bank is far from tapering its asset purchases or raising interest rates.
  • “Now is not the time to be talking about an exit” from easy monetary policy, the central bank chief said in a virtual discussion.
  • The comments come after various Fed officials suggested that inflation could pick up faster than expected and, in turn, prompt an early rate hike.
  • Powell rebuffed fears of an unexpected policy shift, noting the central bank will notify the public “well in advance” if it is considering changes to its policy stance.
  • Visit Business Insider’s homepage for more stories.

Those worrying the Federal Reserve will prematurely rein in monetary stimulus have little to fear, Fed Chairman Jerome Powell said Thursday.

As COVID-19 vaccines roll out across the country, investors and economists have looked to Fed officials for any hints as to when its extremely accommodative policy stance could reach its conclusion. The central bank is currently buying $120 billion worth of Treasurys and mortgage-backed securities each month to ease market functioning, and its benchmark interest rate remains near zero to encourage borrowing.

An unexpected reversal from such easy monetary conditions risks spooking financial markets and cutting into the country’s bounce-back. Powell emphasized on Thursday that the central bank remains far from adjusting monetary conditions and that markets need not worry about a surprise policy shift.

“Now is not the time to be talking about an exit,” the central bank chief said in a virtual discussion hosted by Princeton University. “I think that is another lesson of the global financial crisis, is be careful not to exit too early. And by the way, try not to talk about exit all the time if you’re not sending that signal.”

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The messaging mirrors past statements from Fed policymakers. Early in the pandemic, Powell told reporters the central bank wasn’t “thinking about thinking about” lifting interest rates. The Federal Open Market Committee noted last month that changes to its policy stance won’t arrive until “substantial forward progress” toward its inflation and employment objectives is made.

Still, recent commentary from some officials has stoked some fears that the Fed could cut down on the pace of its asset purchases sooner than expected. Kansas City Fed President Esther George said Tuesday that inflation could reach the Fed’s target “more quickly than some might expect” if the economy’s hardest hit sectors quickly recover.

A swifter-than-expected rebound could prompt an interest-rate hike as early as mid-2022 Atlanta Fed President Raphael Bostic said Monday. The projection stands in contrast with the FOMC’s general expectation for rates to remain near zero through 2023.

Powell reassured that, when the Fed starts considering a more hawkish stance, messaging will come well before action is taken. Treasury yields responded in kind, with the 10-year yield climbing nearly 4 basis points to 1.127 and the 30-year yield rising about 6 basis points to 1.874.

“We’ll communicate very clearly to the public and we’ll do so, by the way, well in advance of active consideration of beginning a gradual taper of asset purchases,” the Fed chair said.

Read more: Morgan Stanley says to buy these 26 economically sensitive stocks poised to outperform as oil prices spike 10% by year-end

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Joe Biden can help remake the Federal Reserve so that it actually helps America’s workers

joe biden
President-elect Joe Biden

  • The Federal Reserve is finally starting to take the concerns of average workers more seriously in its monetary policymaking.
  • In order to cement this commitment to workers and full employment, President-elect Joe Biden should nominate Fed Board members with a background in organized labor.
  • There have been a vanishingly small number of labor leaders at the Fed over its long history, this needs to change.
  • Kaleb Nygaard is a graduate student at Yale’s School of Management studying Systemic Risk. He is the Editor in Chief of the central banking education website Centralverse and the host of The Bankster Podcast.
  • This is an opinion column. The thoughts expressed are those of the author.
  • Visit Business Insider’s homepage for more stories.

It’s time for someone to truly represent the voice of workers at the Federal Reserve.

The health and economic one-two-punch of COVID-19 has had a particularly devastating effect on working-class families. It has also made it clear that policymakers need to focus their efforts on helping those families. 

Despite this, not a single person with a background in organized labor has had a vote on the Federal Reserve’s all-important Open Markets Committee (FOMC), past or present. Since it was formalized in the 1930s Banking Acts, there have been 179 people who have served on the committee. 

Adding someone with a background in labor to the leadership of the Fed would help ensure these working-class families have representation at the most important macroeconomic decision-making-table in the country. 

To repeat, not a single one has had a background in Labor. 

In January, President Biden should change that.

A seat at the table and a voice at the Fed

There are two types of participants on the FOMC: seven Governors who work from the Fed office in Washington DC and 12 Presidents who head the Reserve Banks spread across the country. How they are chosen and who does the choosing is very different for the two types. 

The seven Governors are nominated by the US President and confirmed by the Senate in the same fashion that Cabinet Secretaries or Supreme Court Justices are chosen. 

By law, the Governors are supposed to consist of “a fair representation of the financial, agricultural, industrial, and commercial interests, and geographical divisions of the country”. 

One of the seven seats sits empty at the moment. On day one, President Biden should nominate someone with a background in labor to fill the seat, and whichever party controls the Senate should confirm the nominee. 

The selection process for the 12 Presidents is more complicated. Each Reserve Bank is overseen by a nine-member Board of Directors. Three are bankers, elected by banks in the area. Three are non-bankers, elected by banks in the area. And three are non-bankers, appointed by the seven Governors in Washington DC. The six non-bankers are the ones responsible for choosing the Reserve Bank President. 

By law, the non-banker-directors are supposed to consist of “the interests of agriculture, commerce, industry, services, labor, and consumers.” So although the process is more complicated and less democratic for the selection process of the Reserve Bank Presidents, the legal foundation upon which it sits explicitly includes Labor representation.

In the full 106-year history of the Fed, only 45 representatives of labor have been on the Board of Directors of the 12 Reserve Banks. 

Chart 1

And when you look at it as a percentage of the non-banker directors, the lack of labor representation is even more paltry.

Chart 2

Less than 20% of the labor representatives were elected by banks. The remaining 80% plus were appointed by the Governors in Washington DC. The total per district also varies greatly. The Federal Reserve Bank of New York has had the most with nine, and the Federal Reserve Bank of Atlanta has not had a single one. 

Chart 3

In August, the Fed announced the conclusion of their first-ever-public framework review. There were many changes made because of the review, but the overall thrust of the changes was to give greater attention to improving the employment situation of average Americans, with the greatest impact of the changes going to working-class families. 

This focus on the labor market and working families even showed up in 2019, when the Fed made a sharp turnaround and reversed the interest rate increases they had made in the previous few years. They admitted they’d missed the mark on full employment. As Chairman Jay Powell said at the time: “We really have learned that the economy can sustain much lower unemployment than we originally thought without troubling levels of inflation”.

To confirm the spirit of both the Fed’s 2019 admission of misreading the employment situation and the 2020 policy changes, President Biden should nominate someone with a background in labor to fill the empty Governor seat. Going forward, this would ensure that the voices of the tens of millions of working-class families who are struggling through the effects of the pandemic, are heard in the decision-making room of our country’s central bank.

For the same reasons, the Reserve Bank Board of Directors should consider candidates with a background in Labor for future Reserve Bank President positions. 

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