Julia Coronado [email protected] Laura Rosner [email protected] October 19, 2020

Fedspeak Review: Clarity Deferredi Most Fed speakers of late have indicated they are happy to see the economic recovery continuing to prove more resilient than many expected given the reduction in fiscal support in August and a continued elevated incidence of COVID-19. Most attributed the resiliency as resulting in large part from the aggressive scale of earlier fiscal and ongoing monetary support, and Vice Chair Clarida summed up the general sentiment of being comforted but not complacent noting that “it will take some time to return to the levels of economic activity and employment that prevailed at the business cycle peak in February, and additional support from monetary—and likely fiscal—policy will be needed. Speaking for the Fed, I can assure you that we are committed to using our full range of tools to support the economy and to help ensure that the recovery from this difficult period will be as robust and rapid as possible.”

Clarida’s reference to “additional” monetary support received some notice from investors. While guidance on interest rate policy is tied to economic objectives, QE policy remains ambiguous. We don't know whether Clarida's "additional support" is referencing the possibility of a longer period of the current pace of asset purchases possibly tied to economic objectives, a faster pace of QE (particularly if fiscal support isn’t forthcoming), or longer maturities for the same pace of Treasury purchases. Comments by even dovish FOMC participants such as Presidents Daly and Evans suggest they have in mind staying the course on the current pace of QE for as long as necessary, and many on the Committee struggle to see how additional margins of QE would be beneficial with interest rates already so low. Vice Chair Quarles also garnered some notice by pondering whether “the sheer volume” of the Treasury market means there is “some indefinite need for the Fed to provide, not as a way of supporting the issuance of Treasuries, but as the way of supporting a functioning market in Treasuries, to participate as a purchaser for some period of time.” It seems many on the Committee are continuing to hope additional fiscal support will be forthcoming and preclude the need for enhanced monetary support given the low efficiency of their remaining policy levers.

Presidents Bostic, Kashkari and Rosengren sponsored a conference on racial inequality and received frank feedback that the Fed must do more despite the bluntness of tools. They pledged to take concrete steps toward addressing persistent inequality through their own hiring and promotion practices, leading research and data collection efforts, thinking more expansively about the implementation of the Community Reinvestment Act (CRA), adding the input from labor and community leaders to the Fed’s , and running the recovery stronger for longer so that the most vulnerable in the labor market realize benefits. Governor Brainard gave a separate speech discussing how the Fed’s current proposals at reforming CRA implementation will help channel credit more effectively to minority communities.

President Bostic was questioned on his interest in being Treasury Secretary or Fed Chair under a Biden Administration and demurred, and Governor Brainard is widely rumored to be a leading candidate for Treasury Secretary. We will explore possible changes to the structure of the FOMC and implications for policy in a future note.

Vice Chair Clarida’s outlook speeches 10/19 and 10/14

• Vice Chair Clarida noted that while the recovery is still coming out of a very deep hole, the recovery to date has been more robust than expected reflecting “robust fiscal support” and a more powerful response to monetary policy than many expected early in the crisis. He expects it will take another year for GDP to return to pre- pandemic levels and even longer to reach maximum employment, although he still sees elevated uncertainty around the outlook as developments around the virus are still the driving factor.

March 27, 2017 Julia Coronado [email protected]

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• Clarida gave another full throated endorsement of the recently announced forward guidance saying it implies that “going forward, a low unemployment rate, in and of itself, will not be sufficient to trigger a tightening of monetary policy absent any evidence from other indicators that inflation is at risk of moving above mandate-consistent levels” and “elevates the importance—and the challenge—of keeping inflation expectations well anchored.” • Clarida’s assessment that “additional support from monetary—and likely fiscal—policy will be needed” for a full recovery garnered some attention as investors wondered whether the Fed could be readying new dimensions of policy support. Clarida didn’t clarify, but we suspect he was referencing the ongoing support from low rates and open-ended bond purchases. The message from both speeches was that the recovery continues to proceed at a better than expected pace because of policy support and the Fed is committed to seeing the job through with its current open-ended stance of zero rates and QE so that "the recovery from this difficult period will be as robust and rapid as possible".

Chair Powell on IMF panel on cross border payments and digital currencies 10/19

• Chair Powell participated in a panel hosted by IMF director Georgieva and said the Fed is committed to carefully evaluating the costs and benefits of a digital currency, but emphasized there is still a great deal of work to be done before they can make a decision. He said improving the payments system is the Fed's primary motivation and that a Fed backed digital currency would be a complement to, not a replacement for cash. • Powell noted that it is important for the Fed to stay on the frontier of technology to preserve the dollar's role as reserve currency, but he also emphasized that it is more important to get it right than to be first.

Atlanta Fed President Bostic on Face the Nation 10/18

• President Bostic noted two tracks for the recovery, one that was proceeding in a “very robust way” and segments of the service sector and lower income workers that “are seeing much more difficult situations.” • Bostic noted that the Fed’s unwillingness to talk about widening inequality in the past was a mistake and they are starting to make it an area of greater focus. Asked if he would be interested in being either Treasury Secretary or Fed Chair in a Biden Administration Bostic didn’t say no but indicated he was focused on navigating the current economic crisis.

The Fed’s Balance Sheet Has Resumed Expansion on Steady Asset purchases, Stabilizing Liquidity Facilities

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San Francisco Fed President Daly’s interview with the WSJ 10/15 and speech on inequality 10/13

• Daly noted that “the bridge that we are trying to build to get Americans over the coronavirus depends considerably on fiscal agents doing the part that they need to do to complement the policies we’ve taken at the Fed…Without that fiscal stimulus, my outlook is quite a bit more muted.” • Asked if a lack of fiscal support would change her assessment that monetary policy is “in a good place” Daly endeavored to “clear up some misconceptions” noting that a more muted recovery would mean they keep the current policy in place for longer, not that they would need to announce new policy measures. • On asset purchases Daly noted that they are “providing valuable insurance…in the event that we get some more spikes in Covid across the world, across the country, and financial markets get a little rattled.” Their purchases serve to provide liquidity and “control interest rates along the yield curve.” Daly demurred on whether she favored clarifying guidance on asset purchases or tying it to economic objectives, saying instead that “we need to keep our minds open and we need to be agile, flexible, and prepared to do whatever it takes.” • Daly reiterated her support for the results of the policy review and the recent clarification in forward guidance, and she repeated her view that wage growth will be the signal that the labor market is tight.

Fed Policy and a Flow of Data Still Beating Expectations is Keeping Markets Resilient Despite Fiscal Disappointment

Vice Chair Quarles’ speeches on the financial system during the COVID-19 crisis 10/14-10/15

• Vice Chair Quarles attributes ”a good portion” of the stronger than expected recovery to date mainly to the “inherent dynamism and flexibility of the American economy” rather than aggressive fiscal and monetary support and is therefore more optimistic it can continue. Nonetheless, he acknowledges that “the labor market remains deeply depressed, and employment is far short of the ’s maximum employment goal” and said he supported the strengthened forward guidance on interest rate policy announced in September. • Quarles noted that the enhanced regulation of banks in the aftermath of the Global Financial Crisis “has borne a great deal of fruit” as banks have continued to serve as a source of liquidity and strength through the crisis and recovery. He emphasized that “robust stress testing has been at the core of our strategy” and described the evolution of the Fed’s efforts through the COVID-19 crisis to adjust its stress tests to evolving conditions. Quarles went on to note that the complex system of nonbank financial intermediation (NBFI) was less resilient than banks and he has been coordinating with regulators from other countries and international organizations to diagnose the weaknesses in the system exposed by the crisis. They have identified “vulnerabilities in money market funds; dealers’ capacity and willingness to intermediate; market structure in the core government bond markets and, potentially, the role of leveraged investors; and fragilities in US dollar cross-border funding” as contributors to market dysfunction and distress in March while acknowledging complex interaction between nonbank 4

intermediaries and the banking system. He will be announcing a concrete set of proposals at the G20 meeting in November for follow up work. • In a second speech Quarles outlined in greater detail the dimensions of dysfunction in NBFI that led to “the kaleidoscopic gallimaufry of actions…to address the dysfunctions: emergency lending facilities under section 13(3) of the to support liquidity in funding markets.” He cited “the commercial paper market and prime and tax-exempt money market funds, as key examples” of fragility reminiscent of the GFC despite reforms. He also noted the Treasury market dysfunction and said that given the markets’ importance to global capital markets the Fed must explore “what can be done to improve Treasury market functioning over the longer term so that this market can withstand a large shock to demand or supply.” In exploring what reforms are needed to address vulnerabilities exposed during March and April, Quarles said he is “struck at the prominence of the continued need to focus on vulnerabilities associated with short-term funding” although he noted that historically this has always been the case in financial crises. • Quarles pondered whether “the sheer volume” of the Treasury market has “outpaced the ability of the private- market infrastructure to kind of support stress of any sort” and therefore there may be “some indefinite need for the Fed to provide, not as a way of supporting the issuance of Treasuries, but as the way of supporting a functioning market in Treasuries, to participate as a purchaser for some period of time.” He noted this is an outstanding question the Fed is considering.

Richmond Fed President Barkin speech 10/15

• President Barkin discussed the latest results of the CFO survey the Richmond Fed conducts in cooperation with the Atlanta Fed and Duke University. The survey confirmed both the progress reflected in recent data and growing optimism even as it highlighted the depth of the hole with only 20% of firms expecting revenue to return to pre- COVID levels before mid-2021. Firms remain cautious about investing and hiring but also reported difficulties sourcing skilled labor and expectations for firm wage gains. Barkin sees elevated household savings as a potential tailwind for the recovery if the virus abates and consumers gain confidence. • Barkin signaled his support both for the results of the framework review and the revamped forward guidance announced in September, noting “The Fed will aim to keep rates low until we see moderate overshoots of inflation or the development of financial stability risks.”

Boston Fed President Rosengen’s outlook speech 10/8-10/13

• President Rosengren returned to his focus on financial stability in his most recent speech emphasizing the role that low rates play in facilitating the build up of leverage that can amplify a downturn noting that “a prime example in the current downturn is commercial real estate, where the high leverage build-up before the crisis and the severe hit from the crisis have led to a noticeable tightening in credit conditions.” Rosengren underscored that lack of regulatory and supervisory tools in the US to address the build up of financial stability risks and concluded that “If we expect to remain in a low-interest-rate environment for a protracted period of time, we need to take more precautions against financial stability risks for when the next economic shock hits.”

New York Fed President Williams’ speech 10/7

• Williams gave a speech on the Fed’s new flexible average inflation targeting regime outlining the motivations and concluding that the most notable changes to their prior strategy was an explicit intention to overshoot 2% after period of undershooting and a single focus on attaining maximum employment. Williams remains optimistic on the recovery although he emphasized that the Fed is far from its objectives and is committed to supporting the recovery. 5

Chicago Fed President Evans’ speech 10/7

• Evans noted the recovery has been more resilient than he expected given the ongoing elevated incidence of the virus and concluded that fiscal and monetary policy played key supporting roles. His outlook is based on additional fiscal support and he indicated a willingness to add monetary support if it were not forthcoming saying “I’m pretty comfortable with our asset purchase plan, but I think we have the capacity to do more asset purchases.” Evans has expressed some skepticism of how much the Fed can support the recovery beyond what it is currently doing given that interest rates are already so low.

i The authors are President and Founder and Senior Economist at MacroPolicy Perspectives LLC, an economic research consulting firm. The information presented represents the views of the authors and is not intended to be, and should not be considered, investment, tax, or legal advice.