The big news yesterday was the Fed officially starting to dial back bond purchases as concerns about inflation still persist. The Fed officials agreed to wind down the $120-billion-a-month asset-purchase program by $15 billion in each November and December. This signals a pace that would completely phase out the purchases by next June. Today, we go through the main points in the FOMC statement and share pull quotes from Jerome Powell’s press conference.
- See the FOMC official statement here.
- Watch Jerome Powell’s 1-hour long press conference here.
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FOMC Statement Highlights
- “With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have improved in recent months, but the summer’s rise in COVID-19 cases has slowed their recovery. Inflation is elevated, largely reflecting factors that are expected to be transitory. Supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.”
- “The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent.”
- “The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time”
- “The Committee decided to begin reducing the monthly pace of its net asset purchases by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities.”
- “In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals.”
Highlights From Jerome Powell’s Press Conference
“At the Federal Reserve, we are strongly committed to achieving the monetary policy goals that Congress has given us: maximum employment and price stability. Today the FOMC kept interest rates near zero and, in light of the progress the economy has made toward our goals, decided to begin reducing the pace of asset purchases. With these actions, monetary policy will continue to provide strong support to the economic recovery.”
- On labor participation: “Participation for prime-aged individuals also remains well below pre-pandemic levels, in part reflecting factors related to the pandemic, such as caregiving needs and ongoing concerns about the virus. As a result, employers are having difficulties filling job openings. These impediments to labor supply should diminish with further progress on containing the virus, supporting gains in employment and economic activity.”
- On rising inflation: “The supply and demand imbalances related to the pandemic and the reopening of the economy have contributed to sizable price increases in some sectors … Bottlenecks and supply chain disruptions are limiting how quickly production can respond to the rebound in demand in the near term. As a result, overall inflation is running well above our 2 percent longer-run goal. Supply constraints have been larger and longer lasting than anticipated. Nonetheless, it remains the case that the drivers of higher inflation have been predominantly connected to the dislocations caused by the pandemic, specifically the effects on supply and demand from the shutdown, the uneven reopening, and the ongoing effects of the virus itself.”
- On raising interest rates: “Our decision today to begin tapering our asset purchases does not imply any direct signal regarding our interest rate policy. We continue to articulate a different and more stringent test for the economic conditions that would need to be met before raising the federal funds rate.”
Question and Answer Highlights
- More color around raising rates: “It is time to taper, we think because the economy has achieved substantial further progress toward our goals … We don’t think it’s time yet to raise interest rates. There is still ground to cover to reach max employment, both in terms of employment and in terms of participation.”
- Baseline expectation from the Fed: “Supply bottlenecks and shortages will persist well into next year and elevated inflation as well. And that as the pandemic subsides, supply chain bottlenecks will abate and job growth will move back up. And as that happens inflation will decline from today’s elevated levels. Of course, the timing of that is highly uncertain, but certainly we should see inflation moving down by the second or third quarter.”
- On the impact of wage increases: “Wages have been moving up strongly – very strongly. In particular I would point to the employment compensation index reading that we got last Friday. Now, in real terms, they had been running a little bit below inflation, so real wages were not really increasing. I think with the ECI reading it becomes close to – maybe not increasing but close to back to zero – in terms of the real increase. So wages moving up of course is how standard of living increases over the years for generation upon generation – it’s very important and it’s generally a good thing. The concern is a somewhat unusual case where if wages were to be rising persistently and materially above inflation and productivity gains, that could put downward pressure on margins and cause company’s – or their employer’s really – to raise prices as a result and you could find yourself in what we used to call a wage-price spiral. We don’t have evidence of that yet. Productivity has been very high. The ECI reading is just one reading. So we’ll be watching this carefully, but I would say at this point we don’t see troubling increases in wages and we don’t expect those to emerge.”
- On fighting ‘transitory’ inflation: “We are accountable to Congress and the American people for maximum employment and price stability. The level of inflation we have right now is not at all consistent with price stability – by the way, we’re also not at maximum employment as I mentioned – I would want to ensure the people that we will use our tools as appropriate to get inflation under control. We don’t think it’s a good time to raise interest rates, though, because we want to see the labor market heal further.”
- On the Delta variant’s impact: “We have to be humble about what we know in this economy which is still very Covid-affected … A lot of what we’re seeing in the last 90 days is because of Delta. We were on a path to a much different place – Delta put us on a different path.”
Nothing in today’s report came as a shock to the markets or anyone following communications from the Fed over the past few months. The Fed officials have telegraphed the move to reduce asset purchases for months. The overarching sentiment from Jerome Powell is that inflationary pressures are mostly due to the imbalance in supply and demand caused, in part, by the pandemic. At Cents, we anticipated a ‘bullwhip’ effect as the economy reopened which has been further exacerbated by the Delta variant. We will continue to monitor macro trends and updates from the Fed as they relate to the market.