Federal Reserve policymakers are trying to calibrate the uncertainties of a pandemic, a vaccine rollout, and the impact of fiscal and monetary stimulus on the economy and inflation—not to mention a political crisis.
A tall order, and perhaps best fulfilled by as little calibration as possible. “The fewer things we change, the better,” is the way Philadelphia Fed chief Patrick Harker put it.
Disappointing Vaccine Rollout Delaying Economic Growth, Recovery
For instance, Harker would prefer not to change the pace of bond purchases this year from the current $80 billion in Treasuries and $40 billion mortgage securities each month, though he conceded the Fed could begin tapering by the end of the year depending on the course of the virus.
Taking part in a Philadelphia Business Journal conference last week, Harker said the rollout of the COVID-19 vaccine “has been incredibly disappointing so far.”
That will push back any growth surge in the economy to the second half of the year, after a first quarter that may see negative growth. Recovery will be uneven, Harker predicts, and some jobs may never return as the pandemic has forced the pace of automation.
Fed Vice Chair Richard Clarida, a member of the board of governors, said in a presentation to the Council on Foreign Relations Friday that he expects the Fed to keep up the current pace of asset purchases through 2021 even if the economy picks up. He said:
“I think it could be quite some time before we would think about tapering the pace of our purchases the way I look at the data, and I’m relatively optimistic about the economic outlook.”
On questioning, Clarida said that he was angered “like all Americans” at the images of mobs storming the Capitol last week. He added, though, that the Fed looks forward to working with the economic team named by President-elect Joe Biden, led by former Fed chair Janet Yellen as Treasury secretary.
Biden is also said to be considering another Fed veteran, Nellie Liang, for a high post in the Treasury Department, perhaps as undersecretary for domestic finance. Liang, an economist who worked at the Fed in various capacities from 1986 to 2017, was nominated to the board of governors in 2018 but she withdrew after her nomination never got a hearing in committee. She is currently at the Brookings Institution.
Other Fed regional bank chiefs fanned out into their districts and beyond last week to provide some nuance on Fed thinking. Richmond Fed chief Thomas Barkin echoed Harker’s remarks that the initial slow rollout of the vaccine is delaying a return to normal, postponing it to sometime this summer “at best.”
He welcomed the recent spike in Treasury yields, however, as a sign that investors are expecting higher inflation. “That is what we are trying to support,” he said last week in a webcast with North Carolina businesses.
But Chicago Fed President Charles Evans was skeptical about a higher inflation rate. He said the push in inflation from the fiscal stimulus was not “nearly as strong as I would like.” He thinks inflation won’t exceed the 2% targeted by the Fed until 2023 and the Fed could wait until mid-2024 to raise rates under its new policy of letting it run above 2% for some time.
San Francisco Fed chief Mary Daly said she is nonetheless encouraged by the rise in inflation expectations. In virtual remarks at a Shadow Open Market Committee event, she said she believes a stronger job market will fuel higher inflation, even if that will be weaker than in the past.
James Bullard, head of the St. Louis Fed, thinks economic recovery and inflation will be stronger than many expect. The subdued inflation of the past decade may not be a good guide for this year, he told reporters at an event in Little Rock, saying he “would expect more volatile pricing, possibly higher inflation than we’re used to.”
Fed policymakers know that the economy can’t recover until the coronavirus is contained. “At heart it is a public health crisis first. All the economic fallout has been a function of how we responded to the public health crisis,” Atlanta Fed President Raphael Bostic said this week.
“Until that gets settled the economy is going to play out in a slower way.”
If recovery comes more quickly than expected, the Fed might need to recalibrate some of its accommodation, he told the Rotary Club in Atlanta, but he said rate hikes won’t come until late 2022 or early 2023. “A whole lot would have to happen for us to get there,” he said.