Fed’s Williams Not Ready to Pare Aid, but Other Officials Talk Tapering
New York Fed chief John Williams says the central bank is a ways off from achieving its job and inflation goals
Federal Reserve Bank of New York leader John Williams said he isn’t ready for the U.S. central bank to dial back the support it is giving the economy amid uncertainty about the recovery from the pandemic.
“It’s clear that the economy is improving at a rapid rate, and the medium-term outlook is very good,” Mr. Williams said in a virtual appearance Monday. “But the data and conditions have not progressed enough for the [Federal Open Market Committee] to shift its monetary policy stance of strong support for the economic recovery,” he said.
Earlier Monday, the leaders of the Dallas and St. Louis Fed banks said that the day for paring back the central bank’s bond-buying stimulus is growing closer.
Mr. Williams’s comments were his first public remarks since last week’s rate-setting FOMC meeting, at which officials held their short-term interest-rate target at near zero and pressed forward with monthly purchases of $80 billion in Treasurys and $40 billion in mortgage bonds.
Even as it maintained its policy stance, the central bank, heartened by a rapid economic recovery and seeing a rise in inflation, moved forward the timing of when it expects to raise rates, penciling in two increases in 2023. It also acknowledged opening the door to pulling back on its bond-buying stimulus.
Speaking with reporters after his formal remarks, Mr. Williams acknowledged that officials are talking about paring asset purchases, but said that he isn’t ready to call for such a move and that policy makers haven’t yet discussed the tactics of slowing the bond buying.
“We’ve made some progress for sure. We’ve seen progress in employment; we’ve definitely seen a big increase in inflation,” Mr. Williams said. But, “from my perspective, we are quite a ways off from achieving my interpretation of substantial further progress” on the central bank’s job and inflation goals that the Fed said would need to be attained before slowing the asset buying, he said.
The New York Fed leader also rejected the idea that financial markets had reacted adversely to the central bank’s policy meeting in a replay of the so-called 2013 taper tantrum in which yields surged when the Fed discussed a pullback in bond buying.
“I definitely would not describe this as a mini taper tantrum of any kind,” and markets are just reacting to what the Fed has said and reflecting their own assessment of the economic outlook, he said.
Mr. Williams said Monday in his formal remarks that the recovery process is being buffeted by various disruptions and shifts. He said he expects to see a blistering 7% growth this year and that supply bottlenecks and shortages are driving up inflation, which could rise to 3% this year before ebbing back to the Fed’s target of 2% next year. But he added, “There is a great deal of uncertainty about the inflation outlook, and I will be watching the data closely.”
Mr. Williams said demand for labor is strong, adding, “I am confident that we will see continued strong job gains going forward.” He also said there is a lot of churn in the hiring process now.
Before Mr. Williams spoke, Robert Kaplan of the Dallas Fed and James Bullard of the St. Louis Fed said the time for the central bank to rethink its strong support for the economy is getting closer, if it hasn’t already arrived. They didn’t specify when the central bank should act during a joint virtual appearance.
Mr. Kaplan, reiterating a view he has held for some time, said, “I’ve been more of a fan of doing some things, maybe, to take our foot gently off the accelerator sooner rather than later so that we can manage these risks” around the recovery process, in a bid to “avoid having to press the brakes down the road” with a more abrupt shift in monetary policy.
Meanwhile, Mr. Bullard said that when it comes to asset buying “the debate is open, and I think it’s appropriate” that the Fed is considering when to pull back. He added that the process of getting to such a tapering decision won’t happen super quickly, saying, “The committee is only now starting to talk about tapering, and that will take some time to get that organized.”
Neither Messrs. Bullard or Kaplan holds a vote on the rate-setting FOMC this year, but Mr. Williams does given his role as vice chairman of that body. On Friday, Mr. Bullard said in a television interview that he now believes the Fed would need to raise rates by late next year, roiling markets. Meanwhile, Fed Chairman Jerome Powell stressed at his press conference after the FOMC meeting that officials aren’t actively debating a shift in rates at all and are instead focused on the outlook for asset purchases.
Mr. Bullard also said in the Monday appearance that the Fed should give special consideration to its mortgage bond purchases given that they are happening in an economy with a strong housing market, adding that “there’s a good question there about whether it’s time to retire our intervention” into housing finance.
Mr. Kaplan concurred and said, “At this stage we’re questioning whether the housing market really needs this Fed support of $40 billion a month” in mortgage bond purchases.
Mr. Williams, in his comments to reporters, played down any concerns about massive sums of money flowing into the central bank’s reverse repo facility. As he has in the past, Mr. Williams said the facility is working as expected. Money has flowed into the facility amid a shortage of short-term investments, with usage surging after the central bank raised the rate on the facility from zero to 0.05% at the FOMC meeting.