Karim writes:

Question: On timing of tapering
If the labor market continues to improve at the current pace, could taper in the next few meetings.
Asked if he expected this to occur before Labor Day; depends on the data.
Did not answer question about how much warning he would give the market before tapering.

Question: Exit principles
First have to wind down purchases. He emphasized that the outlook for the labor market is the key driver (not inflation) for whether to taper. And he emphasized that buying at a lesser pace is still easing.
Says no need to sell securities at this point. Makes case for letting securities roll-off in terms of market impact and remittances to Treasury. And he also expresses a desire to return to a Treasury only balance sheet at some point, though also says MBS likely to just roll off the balance sheet.

Text Excerpts Below

  • A key adjective between some and improvement in the labor market is still missing!
  • Removing policy accommodation and policy tightening not appropriate at this juncture (no guidance).
  • Also notes that buying assets at a lower pace (tapering) is still providing accommodation.
  • Many focusing on removing policy accommodation phrase thus has nothing to with tapering (that it is referring to ending QE altogether).
  • Rest of text is largely a rehash of defense of cost/benefit analysis of low rates, headwinds from fiscal policy, and scarring effects of long-term unemployment.

Good report, thanks!

Some interesting language here:

Conditions in the job market have shown some improvement recently. The unemployment rate, at 7.5 percent in April, has declined more than 1/2 percentage point since last summer. Moreover, gains in total nonfarm payroll employment have averaged more than 200,000 jobs per month over the past six months, compared with average monthly gains of less than 140,000 during the prior six months. In all, payroll employment has now expanded by about 6 million jobs since its low point, and the unemployment rate has fallen 2-1/2 percentage points since its peak.

Despite this improvement, the job market remains weak overall: The unemployment rate is still well above its longer-run normal level, rates of long-term unemployment are historically high, and the labor force participation rate has continued to move down.

Over the nearly four years since the recovery began, the economy has been held back by a number of headwinds. Some of these headwinds have begun to dissipate recently, in part because of the Federal Reserve’s highly accommodative monetary policy. Notably, the housing market has strengthened over the past year, supported by low mortgage rates and improved sentiment on the part of potential buyers. Increased housing activity is fostering job creation in construction and related industries, such as real estate brokerage and home furnishings, while higher home prices are bolstering household finances, which helps support the growth of private consumption.

Recognizing the drawbacks of persistently low rates, the FOMC actively seeks economic conditions consistent with sustainably higher interest rates. Unfortunately, withdrawing policy accommodation at this juncture would be highly unlikely to produce such conditions. A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further.

The Chairman has previously indicated that inflation risks are asymmetrical, as they feel reasonably secure about being able to deal with higher inflation via rate hikes, vs feeling reasonably insecure about addressing deflationary forces given the 0% lower bound on rates.

Such outcomes tend to be associated with extended periods of lower, not higher, interest rates, as well as poor returns on other assets.

Japan, for example

Moreover, renewed economic weakness would pose its own risks to financial stability.

Euro zone?

In the current economic environment, monetary policy is providing significant benefits. Low real interest rates have helped support spending on durable goods, such as automobiles, and also contributed significantly to the recovery in housing sales, construction, and prices. Higher prices of houses and other assets, in turn, have increased household wealth and consumer confidence, spurring consumer spending and contributing to gains in production and employment. Importantly, accommodative monetary policy has also helped to offset incipient deflationary pressures and kept inflation from falling even further below the Committee’s 2 percent longer-run objective.

Again, deflation concerns

That said, the Committee is aware that a long period of low interest rates has costs and risks. For example, even as low interest rates have helped create jobs and supported the prices of homes and other assets, savers who rely on interest income from savings accounts or government bonds are receiving very low returns. Another cost, one that we take very seriously, is the possibility that very low interest rates, if maintained too long, could undermine financial stability. For example, investors or portfolio managers dissatisfied with low returns may “reach for yield” by taking on more credit risk, duration risk, or leverage. The Federal Reserve is working to address financial stability concerns through increased monitoring, a more systemic approach to supervising financial firms, and the ongoing implementation of reforms to make the financial system more resilient.