Minutes from the Federal Reserve’s April meeting showed some officials wanted to soon talk about a plan to pull back some central bank support for the economy if “rapid progress” persisted.
Federal Reserve officials were optimistic about the economy at their April policy meeting as government aid and business reopenings paved the way for a rebound — so much so that and “a number” of them began to tiptoe toward a conversation about dialing back some support for the economy.
Fed policymakers have said they need to see “substantial” further progress toward their goals of inflation that averages 2 percent over time and full employment before slowing down their $120 billion in monthly bond purchases. The buying is meant to keep borrowing cheap and bolster demand, hastening the recovery from the pandemic recession.
Officials said “it would likely be some time” before their desired standard was met, minutes from the central bank’s April 27-28 meeting released Wednesday showed. But the minutes also noted that a “number” of officials said that “if the economy continued to make rapid progress toward the committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases.”
The line was among the clearest signals yet that some Fed officials had considered beginning a serious conversation about pulling back monetary help. Jerome H. Powell, the Fed’s chair, has been repeatedly asked whether the central bank is “talking about talking about” slowing its so-called quantitative easing program — and he has consistently said “no.”
In fact, when he faced the question at a news conference following the April meeting, Mr. Powell said, “No, it is not time yet. We have said we’ll let the public know when it is time to have that conversation, and we’ve said we’d do that well in advance of any actual decision to taper our asset purchases, and we will do so.”
That could be because while a “number” of individual policymakers are beginning to think out loud about when to begin discussing the policy shift, the full committee has yet to decide to start the conversation.
In any case, the April minutes may already be out of date. Surprising and at times confusing data released since the meeting could make the Fed’s assessment of when to dial back support — or even to start talking about doing so in earnest — more difficult. A report on the job market showed that employers added far fewer new hires than expected. At the same time, an inflation report showed that an expected increase in prices is materializing more rapidly than many economists had thought it would.
“You just have to gather more information,” said Julia Coronado, founder of MacroPolicy Perspectives and a former Fed economist. “It’s going to be noisy for months, and months, and months.”
The Fed has also set its policy interest rates at near-zero since March 2020, in addition to its bond purchases. Both policies are meant to help an economy damaged by pandemic shutdowns to recover more quickly.
Officials have been clear that they plan to slow down bond-buying first, while leaving interest rates at rock bottom until the annual inflation rate has moved sustainably above 2 percent and the labor market has returned to full employment.
Markets are extremely attuned to the Fed’s plans for bond purchases, which tend to keep asset prices high by getting money flowing around the financial system. Central bankers are, as a result, very cautious in talking about their plans to taper those purchases. They want to give plenty of forewarning before changing the policy to avoid inciting gyrations in stocks or bonds.
Stocks whipsawed in the moments after the 2 p.m. release, tumbling as yields on government bonds spiked. The S&P 500 regained some of its losses by the end of the day, ending down 0.3 percent. The yield on 10-year Treasury notes jumped to 1.68 percent.
Even before the recent labor market report showed job growth weakening, Fed officials thought it would take some time to reach full employment, the minutes showed.
“Participants judged that the economy was far from achieving the committee’s broad-based and inclusive maximum employment goal,” the minutes stated. Many officials also noted that business leaders were reporting hiring challenges — which have since been blamed for the April slowdown in job gains — “likely reflecting factors such as early retirements, health concerns, child-care responsibilities, and expanded unemployment insurance benefits.”
When it comes to inflation, Fed officials have repeatedly said they expect the ongoing pop in prices to be temporary. It makes sense that data are very volatile, they have said: The economy has never reopened from a pandemic before. That message echoed throughout the April minutes and has been reiterated by officials since.
“We do expect to see inflationary pressures over the course, probably, of the next year — certainly over the coming months,” Randal K. Quarles, the Fed’s vice chair for supervision, said during congressional testimony on Wednesday. “Our best analysis is that those pressures will be temporary, even if significant.”
“But if they turn out not to be, we do have the ability to respond to them,” Mr. Quarles added.
Mr. Quarles pointed out that the central bank lifted interest rates to guard against inflationary pressures after the global financial crisis. The expected pickup never came, and in hindsight pre-emptive moves were “premature,” he said. He suggested that the central bank should avoid repeating that mistake.
He said that the key was for the central bank to be prepared, but that if it tried to stay ahead of inflation now it could end up “significantly constraining the recovery.”
Mr. Quarles’s comments came in response to repeated — and occasionally intense — questioning by Republican lawmakers during a House Financial Services Committee hearing, many of whom cited concerns about the recent price inflation report. The back-and-forth underlined how politically contentious the Fed’s patient approach could prove in the coming months. Inflation is expected to remain elevated amid reopening data quirks and as supply tries to catch up to consumer demand.
Some lawmakers pressed Mr. Quarles on how long the Fed would be willing to tolerate faster price gains — a parameter the central bank as a whole has not clearly defined.
When it comes to increases, “I don’t think that we can say that one month’s, or one quarter’s, or two quarters’ or more is necessarily too long,” Mr. Quarles said.
Source: Economy - nytimes.com
