The FOMC decided to maintain its accommodative policy stance, continuing its target range for the federal funds rate between 0% and 0.25% and maintaining its $80 billion purchase of Treasury securities and $40 billion of agency mortgage-backed securities. The statement was virtually identical in substance with the Committee’s last statement, with the big uncertainty being the progress of recovery from the virus.
The Committee discussed the pace and composition of the asset purchase program but clearly reached no conclusions on either. Powell indicated that the goal was substantial progress toward their employment objectives, especially in hard-hit segments such as low-income sectors and the African American and Hispanic communities. But he declined to provide numbers and instead relied upon generalities. He indicated that the Committee would provide advance notice before any changes are put in place, and that the time had not yet come.
The most notable and interesting aspect of the post-FOMC meeting press conference was how focused the press was this time, in contrast to previous briefings, on the nuances of policy and how the FOMC was communicating it. The first question, for example, queried Powell about language from recent FOMC statements that policy will be in place “…until substantial further progress has been made toward its maximum employment and price stability goals.” He was asked if he could define “substantial further progress” with numbers and thresholds, and he couldn’t do it. In terms of inflation, he indicated that they had a 2% target, but when it came to employment, he fell back on the fact that the Committee looks at a number of factors, for example, in the labor market, including unemployment, wages, participation rates, and sub-market measures like employment rates in low-income and minority communities. But he declined to provide specifics and resorted to the notion that “We’ll know it when we see it.”
Another question focused on inflation and what exactly was meant by stating that the current inflation situation is likely to be “transitory.” Powell argued that supply bottlenecks explain the near-term inflation situation, and that the auto industry has been especially impacted because of shortages of semiconductors, which has been a major cause of the price increases for new autos and the subsequent increase in used-car prices. He went on to elaborate that he viewed inflation as a process by which prices kept increasing month after month. The current situation is where he expects that the price increases we are currently seeing will not continue; and while prices will not necessarily decline, there will not be a continuation of sequential prices increases. That’s what “transitory” meant to him.
Powell was also questioned about what policy would be if inflation wasn’t transitory, but continued at its current pace with employment short of full employment. Powell confessed that normally inflation would be low with high unemployment, but that was not the case at the moment. Here he again asserted that while the Committee was monitoring developments closely, inflation was not such as to warrant a policy response, at this time, especially if it turned out to be a transitory issue.
When asked about COVID and how it might influence the path of policy, Powell indicated that the Delta variant surge is but one of several waves; and while the health issues are significant, there has been less and less economic impact as we experience further waves of infection. At this point, he said we just don’t know and will need to wait and see if this is the case with Delta as well.
Finally, Powell was asked if his statement that the Committee had begun discussions on the process and likely exit path from its policy accommodation and asset purchase program constituted the signal that policy changes were to be forthcoming. Powell made clear that the answer was no. The Committee was just exploring its options and had not made any decisions about when or how it would change its policies.
Overall, this was one of the best briefings of recent times, in part because of the way the press stuck to the key issues and questions that were on everyone’s minds and did not veer off into discussion of regulatory policy and other diversions. However, it also became clear that there was not much in terms of specifics or substance or actual target numbers for some of the key terms that constitute the new policy framework that Powell so often promotes in speeches and testimony.
Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
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