MNI EXCLUSIVE: Powell to Resist Pressure to Hone QE Guidance

Federal Reserve Chairman Jerome Powell will likely resist market pressure to clarify what he means by "substantial progress" in the economy at an interest-rate decision and press conference Wednesday, ex-Fed economists and a current advisor told MNI.

"We are nowhere near the labor market of February 2020, so the Fed does not need to define it precisely," said Claudia Sahm, a former Fed board economist. "We will learn so much in the coming months about this recovery."

While the gathering is expected to bring little change to the Fed's policy stance, the market is looking for substantial revisions to the central bank's quarterly forecasts. Even more important to investors driving up Treasury yields is greater clarity from Powell on the likely timing of a reduction in the current USD120 billion monthly pace of bond purchases.

The Fed needs to see "substantial further progress" toward goals of price stability and maximum employment to begin tapering, and Powell has said it's far too soon to begin talking about an exit.

Jeffrey Lacker, ex-president of the Richmond Fed, told MNI a rough measure of substantial progress would be a drop in the unemployment rate after accounting for people who have left the labor force during the pandemic. Powell has pegged that measure at around 10%, and Lacker said it would need to drop by two or three percentage points before calling a strong rebound.

NOT GETTING PINNED DOWN

"The implicit target is under 4% so you judge it accordingly. If his adjusted unemployment rate makes up half of that I think he's entitled to say substantial progress," Lacker said in an interview. "My guess is that's a year off."

Vague guidance gives Powell wiggle room to adapt to different economic paths determined by something outside his control: how fast the U.S. makes progress on Covid vaccinations.

"If Powell uses a phrase like 'substantial progress,' it is because he doesn't want to pin himself down to an exact threshold," said Laura Veldkamp, a member of of the New York Fed's economic advisory panel.

While conditions have improved a lot since December when the Fed first offered its 'substantial progress' guidance, winter storms that slowed activity early this year and job market slack mean FOMC members are likely content to rely on incoming data rather than forecasts of blockbuster growth.

MORE THAN JUST GROWTH

The outlook has improved sharply with the USD1.9 trillion package approved by Congress, while the speed of vaccine rollouts has exceeded even many optimistic estimates.

"A likely reason for avoiding a threshold is because the decision is likely to depend on the outcome of many factors, including possible surprises in variables economists don't typically look at, like shipping delays, mobility or health outcomes," said Veldkamp.

Randall Kroszner, a former Fed board governor, also thinks the desire to keep the guidance on bond buys loose is intentional and here to stay.

"By emphasizing labor market indicators like labor force participation and employment to population ratio, the Fed will remain accommodative longer than if they focused on a more traditional measure like the unemployment rate," Kroszner told MNI.