FOMC Statement and Powell Press Conference

November 3, 2021

The FOMC statement as expected laid out a schedule of tapered new asset purchases that will phase out that activity altogether after next June. Today’s statement indicates another unanimous 11-0 decision but does not address the timing of a subsequent interest rate lift-off.

Monthly increases in Fed holdings of Treasury Securities will be reduced by $10 billion each ensuing month for the next eight months starting with a drop from $80 billion in October to $70 billion in November, then $60 billion in December and so forth to $10 billion in June 2022 zero next July. Likewise, from the existing $40 billion per month through October 2021, increases in the holding of asset-backed securities are to rise $35 billion this month, $30 billion December and so forth.

In the paragraph describing the economy, the statement introduces a shadow of doubt over whether elevated inflation mostly reflects temporary factors. Such factors now “are expected to be transitory.” where the phrase “expected to be” has been newly inserted. The statement, unlike before includes a sentence about other inflationary factors at play, i.e., supply and demand imbalances related to the pandemic and the reopening of the economy.  Also, an “an easing of supply constraints” has been added to progress on vaccinations as reasons why inflation eventually will settle back.

I found the most useful remark at Chairman Powell’s press conference to be his belief that by the time that the maximum employment condition is met for interest rate lift-off, almost assuredly so will the test for price stability. To be sure, Fed officials at such time will verify that inflation conditions indeed do warrant an interest rate hike, but for the time being market participants trying to handicap the timing and speed of interest rate lift-off need only concentrate their research on current and future labor market data. Powell also went to considerable length explaining that the mandate of maximizing employment is a much less straight-forward than the definition for price stability, and that a much broader array of indicators are monitored toward that end.

The persistence of Covid complicates that process immensely. There appears to be an assumption underlying the risk management involved in deciding the optimal timing for interest rate lift-off, and it is that a new post-pandemic normal will emerge in the labor market. I would assert that not only is the the timing of that emergence uncertain, but even the very plausibility of any newly stable post-pandemic economic environment may be fallacious. So long as much of the world population remains unvaccinated, the virus may mutate more at a faster pace than protection can be achieved for the most contagious variant. Boosters that are effective against the Delta Variant may not be so against the next mutation. Covid could become like the flu, requiring fresh and different vaccines periodically. But unlike flu, Covid has more dire consequences for people of working age in terms of morbidity and long-lasting organ damage. The deterrent then for social gathering whether to do one’s job or for recreational purposes is therefore much more open-ended than with any shock seen previously.

Powell argued that the high level of unfilled job openings reflects in part the unwillingness of workers to take on health risk or unable to to do so because of unaffordable daycare. In order to make a determination of what constitutes a state of maximum employment, it’s necessary for to move past those deterrents or at least to understand how large they will remain. That enlightenment may not be forthcoming if there isn’t an end to the Covid-dominated U.S. and global economies.

All that being said, Powell didn’t rule out the possibility of one or more interest rate hikes during the second half of next year. He also underscored, that even with asset tapering and balance sheet tapering that comes later, monetary officials are always monitoring how the economy is performing and comparing such to their expectations, and policy will be adaptable in both directions (less accommodative or more) if deviations emerge. On the inflation mandate, the FOMC is pay particular attention to measures of expected medium-term future price movement.

During the press conference, U.S. share prices and the 10-year Treasury yield rose went up.

Copyright 2021, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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