The Federal Reserve is still considering accelerating its timetable for withdrawing support for mortgage markets when it meets in December, despite uncertainty about the Omicron variant, Fed Chairman Jerome Powell told Senate lawmakers this week.
The economy is “very strong” and inflation is looking like more than a transitory issue, Powell said, so the Fed should consider winding down its $120 billion in monthly purchases of Treasurys and mortgage-backed securities “a few months sooner” than the schedule announced on Nov. 3.
Under that schedule, the Fed would taper its asset purchases by $15 billion a month — by $10 billion a month for Treasury securities, and $5 billion for mortgage-backed securities — winding down by June an emergency program that’s helped keep mortgage rates low during the pandemic.
Minutes of the Federal Open Market Committee’s last meeting, released Nov. 24, revealed that some Fed policymakers thought that plan was too cautious — a sentiment echoed by several senators who grilled Powell and Treasury Secretary Janet Yellen Tuesday at a CARES Act Oversight hearing.
The Fed’s last meeting took place before the emergence of the Omicron coronavirus variant, and uncertainty over the threat it poses to human health and economic growth.
Speaking before the Senate Banking Committee Tuesday, Powell said the recent rise in COVID-19 cases and the emergence of the Omicron variant does pose “downside risks to employment and economic activity and increased uncertainty for inflation.”
Greater concerns about the virus, for example, could reduce people’s willingness to work in person, “which would slow progress in the labor market and intensify supply chain disruptions.”
Nevertheless, Powell said, inflation has run “well above” the Fed’s 2 percent target rate for long enough that it should no longer be characterized as “transitory.”
“I think it’s probably a good time to retire that that word [transitory] and try to explain more clearly what we mean,” Powell told Sen. Pat Toomey, a Pennsylvania Republican, of the Fed’s recent assurances that some factors driving higher inflation are only temporary.
The “all items” Consumer Price Index rose 6.2 percent for the year ending in October, the biggest 12-month jump in inflation since 1990.
Toomey expressed frustration that the Fed is only planning to taper its $40 billion in monthly mortgage-backed securities by $5 billion a month, when, in his view, “the economy is long past recovery — we’re in a full-blown expansion.”
“We have record high asset prices — housing is leading the way, to the point where in many markets, houses are just unaffordable for many people and yet, the Fed is going to purchase $35 billion in mortgage-backed securities in December alone, and is scheduled to continue purchasing mortgage-backed securities for months on end. I would strongly urge you to reconsider the pace of the tapering.”
Those sentiments were echoed by Louisiana Republican Sen. John N. Kennedy, who told Powell that “it’s fair to say that the experts who have been advising you about the future rate of inflation have pretty much the same credibility as those late night psychic hotlines you see on TV.”
“Is the Fed considering increasing the pace of its tapering?” Kennedy asked. “We’ve got to get control of inflation. It’s ravaging our people.”
Virginia Democrat Sen. Mark Warner also weighed in, saying he hoped the Fed would move more aggressively on tapering, as an “insurance policy” against a “potential overheating of the economy” if more workers don’t return to the labor force — a factor economists say could drive up wages and prices.
Powell said the most recent data, particularly since the Fed’s Nov. 3 meeting, “show elevated inflation pressures, a rapid improvement in many labor market indicators, without an accompanying addition of labor supply — and also strong spending that really signals growth, big significant growth in coming months.”
At this point, Powell said, “The economy is very strong and inflationary pressures are high and it is therefore appropriate, in my view, to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner, and I expect that we will discuss that at our upcoming meeting in a couple of weeks.”
Between now and then, Powell said, “We will see another labor market report, another inflation report, and we’ll also get a better sense of the new COVID variant as well before we make that decision.”
On the potential for the Omicron variant to curtail economic growth, Powell said Fed policymakers “are listening to the experts.”
“It’s really about transmissibility — it’s about the ability of the existing vaccines to address any new variant,” Powell said. “It’s about the severity of the disease once it is contracted, and we don’t know.”
Although it will take a month to get detailed answers to those questions, “We’ll know something though within a week or 10 days,” in time for the Fed’s next two-day meeting on Dec. 14, Powell said.
“Then and only then can we make an assessment of what the impact would be on the economy,” Powell said. “As I pointed out in my testimony, for now, [Omicron is] a risk. It’s a risk to the baseline. It’s not really baked into our forecast.”