Despite the soft ISM number this morning, two Federal Reserve policymakers reiterated their expectations that asset purchases will slow in the months ahead. First up is Atlanta Federal Reserve President Dennis Lockhart, who was on the speaking circuit today. Via The Wall Street Journal:
“We are approaching a period in which an adjustment to the asset purchase policy can be considered,” Mr. Lockhart said in the interview. Referring to coming Fed policy meetings, he said of a potential slowing in the purchases: “Whether that’s June, August, September or later in the year, to me, isn’t really the issue,” even as he acknowledged, “It’s the issue for the markets.”
Of course, June is probably out of the question:
It would be too soon to pull back now, Mr. Lockhart said. “I don’t think that as of today we have a set of conditions that absolutely justify an adjustment,” he explained. While the official suggested the most likely direction would be to slow the buying from its current pace, he said he doesn’t have “a fixed sense” of how the Fed should slow down on the buying.
No, June is too early -- they are waiting for more jobs data before making a move. Lockhart is also selling the story that less is not really less:
If the Fed does slow the pace of its bond buying, “this is not a decisive removal of accommodation. This is a calibration to the state of the economy and the outlook. It is not a big policy shift, and I would hope the markets understand that,” Mr. Lockhart said.
I know that the Fed does not want market participants to associate a slowing of asset purchases with tighter policy. I am not sure, however, that it will be easy to persuade Wall Street otherwise. After all, if the Fed wanted looser policy, they would increase the pace of asset purchases. If more is "looser," then why isn't less "tighter?" Alternatively, is "less accommodative" really different from "tighter"?
Lockhart adds this:
The central banker acknowledged that markets are struggling with the issue, and he said any perception that the Fed has been sending mixed messages is mainly a function of the complexity of the ongoing debate Fed officials are having about the issue. But he also cautioned market participants not to get ahead of themselves in trying to divine the monetary-policy outlook.
Isn't that one of the jobs of market participants? To engage in various trading strategies based on the expected path of, among other things, monetary policy? After all, that seems to be the primary reason for the intense interest in policy.
Separately, San Francisco Federal Reserve President John Williams also reiterated his expectation that policy would be making a shift sooner or later. Again, via The Wall Street Journal:
“If the forecast goes as I hope and we see continuing good signs from the labor market [and] overall economic conditions [and] continued confidence in that forecast of substantial improvement, I could see, my own view is that as early as this summer [there could be] some adjustment, maybe modest adjustment downward, in our purchase program,” San Francisco Fed President John Williams told reporters on the sidelines of a conference here.
The outlook is, of course, data dependent. At the current pace of data flow, however, policymakers have their eye on tapering. Williams also makes some comments on inflation, via Reuters:
Williams noted that underlying inflation was at 1 percent, below the Fed's target of 2 percent. Speaking on the sidelines of a seminar in the Swedish capital, he said he saw temporary factors as being the main reason inflation was being held low and expected the inflation rate to return to 2 percent.
Still, it was one of the factors the Fed should watch when deciding on policy, he said.
"If we see continued low inflation and, more worrisome, a fall in long-term inflation expectations, well below 2 percent, then those would be factors that argue for, all else equal, greater total purchases for our program than otherwise," he said.
If the employment outlook holds steady, but price trends conspire to put the Fed's inflation forecast in jeopardy, expect the Fed to push back the timing of a policy shift.
Bottom Line: The Fed is looking to pull back on asset purchases. They expect the data to give them room to do so.