Is It Time To Start Thinking About Thinking About Tapering? No!

FS Insight Team

Federal Reserve Chairman Jay Powell stuck to the script this week in the press conference following the FOMC statement release. He stuck to the script that has become all-too-familiar for most investors. Yes, the economy is improving, but no it is not enough for the Fed to begin to ‘lift-off’ or curtail asset purchases. Inflation is rising but it is transitory. The official line isn’t changing despite the improving economic picture and ahead-of-schedule progress on vaccinations.

The Chairman directly answered whether he was ‘thinking about thinking’ about raising rates or tapering and he directly said the answer is no. The bottom line is this, the Fed’s goals are very ambitious, and the numbers simply aren’t there yet. Powell wants to see again, “substantial” further progress. As of March, the economy still had significantly less jobs than before the pandemic, with 8.4 million less.

Luckily, Powell does not see major scarring in the labor market despite the fact that the Chairman thinks it will be a different economy. He mentioned that the pandemic could lead to some disruption as companies turn to automation and more efficient processes. He said those at the lower end of the economic spectrum and minorities had been the worst affected by labor dislocations.

Powell was also asked about the dramatic rise in housing prices and whether there were localized bubbles forming like those reminiscent to the runup with to the Global Financial Crisis. The Chairman noted that the Federal Reserve monitors housing closely and thinks the pricing is a supply/demand issue rather than an issue of lenders seeking borrowers with lower and lower credit. Most of the purchases have been at the hands of wealthy borrowers with strong credit. The problem he sees is that prices may be moving so high to make first-time home buyers reticent to make that first leap into homeownership.

The Chairman noted that the worst affected sectors are a long-way from full recovery but that significant progress has begun in the recovery. He stressed again that the Fed will not view transitory inflation as a justification for altering monetary policy or asset purchases. The labor market is not tight enough for wages to have risen as much as the Fed would like indicating that momentum is still rising in certain areas of the economy. The Fed will also be closely monitoring labor force participation as the recovery goes forward. He thinks the labor market slack may tighten and move toward equilibrium as unemployment insurance and other government assistance moves into the rearview mirror.

A particularly interesting exchange came when Powell was asked about the criticism of Larry Summers (the Fed Chairman who never was) that the Fed is asleep at the wheel on inflation. Powell started by saying that the main objectives will always be to uphold the dual mandate. He stressed that letting inflation run higher actually enables them to better do that since the average goal for price stability is 2%. Powell seemed energized and more than willing to fend off Summer’s peripheral, and some might say self-serving sniping. “We’re all very familiar with the history of inflation in the 1960s and 1970s, of course,” said Powell before pointing our why today’s situation is different.

Asset purchases continued at a pace of $40 billion a month for MBS and $80 billion a month for Treasuries. The benchmark yield on the 10 year is 1.56%.

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