New York Fed President John Williams (John Williams) on Monday for the Bank of Israel held an online event prepared speech, pointed out that concerns about the Fed’s “average inflation targeting system” will eventually lead to rapid interest rate increases is unfounded. He also pointed out that the time has not come to reduce QE, the Fed hopes that the improvement in the job market relative to the epidemic before there is “substantial progress”. Williams has permanent voting rights on the FOMC during his tenure.
According to reports, Williams said in the speech, some critics believe that the future in order to return inflation to the target level near the average inflation targeting system, may lead to a sharp rise in interest rates. But the data suggest that this is not the case. He noted.
Under an average inflation targeting regime, there is no predictable pattern for sharp reversals or large overshooting of policy rates. This means that under the Fed’s new mechanism, it is not reasonable to make the assumption that “interest rates rise sharply” or that “inflation is too high.
Nominal and real interest rates have more downside to respond to negative shocks under an average inflation-targeting policy than under an inflation-targeting policy, so the corresponding rebound to neutral rates will be larger, but a larger rebound is a feature of the policy’s success. The policy rate remains below the neutral rate when the output gap and inflation are above target, so the rate reversal is actually gradual rather than rapid. I believe that an average inflation targeting system would reinforce expectations anchoring compared to a standard inflation targeting system.
Williams said that the average inflation targeting regime does not push inflation expectations higher than policy makers would like, and it is important to anchor inflation expectations to the target. However, it is still too early to judge the trend of inflation. The Wall Street Journal reported after the release of the speech, Williams’ statement means that there is no reason to assume that there will be a sharp rise in interest rates under the Fed’s average inflation target, or that inflation is too high.
Williams also talked about the issue of interest rate hikes and QE tapering. He believes that in the Fed to reduce QE and raise interest rates, has not achieved further substantial progress in this requirement, and through the purchase of U.S. Treasuries and mortgage-backed securities (MBS) can provide relief, his personal preference for the FOMC to reduce QE first, and then raise interest rates.
In addition, Williams said that the reverse repo operations help the Fed to deal with unexpected shocks, the new pneumonia “Delta” strain of panic may be a reason for the decline in yields. He also pointed out that the Fed is very serious about achieving the goal of full employment.
In a subsequent interview with reporters, Williams talked about the job market. He said the Fed set up a very clear marker, not a quantitative indicator, but the Fed is very clear that it wants to make substantial progress in job market improvement relative to the new crown before the pandemic, which is the focus of his attention, and it is clear that it has not reached that point yet.
Williams declined to take a position on when the labor market improvement would reach a level that would allow the Fed to withdraw economic assistance. He noted that this is a very uncertain period, and he would not predict when the FOMC will decide to change the pace of asset purchases.
In addition during the interview, Williams also talked about the MBS issue. He believes that the Fed’s purchases of Treasuries and mortgage-backed securities (MBS) both help reduce housing costs, and he does not believe that Treasuries and MBS among a focus on housing, while the other is not, they both affect interest rates. Bloomberg said in its report that his statement in fact alludes to the discussion among policymakers about whether the pace of tapering on MBS should be faster than that of Treasuries when tapering debt purchases.
According to the Fed’s previously released minutes of the June monetary policy meeting, in view of the excessive valuation pressure in the housing market, compared to the purchase of U.S. Treasuries, some officials believe that the Fed “faster or earlier” to reduce the purchase of MBS is beneficial. However, several officials objected that the current data provide a less clear signal about the underlying economic momentum. A number of other officials said, according to the proportion of synchronization (commensurately) to reduce the pace of Treasury and MBS purchases is desirable, because this approach will be fully consistent with the FOMC’s previous market communications, and the purchase of Treasury and MBS are through a broader impact on financial conditions to provide an accommodative policy.
The 10-year U.S. bond yield had fallen during the day, but bottomed and recovered before entering the U.S. session, and that uptrend continued into the U.S. session. At press time, the 10-year U.S. bond yield was at 1.375%, up 1.9 basis points intraday.