Yesterday Federal Reserve Chair Jerome Powell reiterated the comments of his Board colleagues and declared that Atlanta Federal Reserve President Raphael Bostic’s taper talk was premature. Powell:

Let me start by agreeing that now is not the time to be talking about exit. I think that — another lesson of the global financial crisis is be careful not to exit too early and, by the way, try not to talk about exit all the time if you’re not — you know, if you’re sending that signal, because the markets are listening. The economy is far from our goals. And as I mentioned a couple times, we’re strongly committed to our framework and using our monetary policy tools until the job is well and truly done. And I think the taper tantrum, you know, as you asked about the taper tantrum, it highlights, I think, the real sensitivity that markets can have about the path of asset purchases. So you know, we know we need to be very careful in communicating about asset purchases.

That should put an end to that topic for now, but note that if reporters keep asking Fed presidents about tapering, eventually they will find one who will “helpfully” provide a hypothetical example of how the Fed could get to tapering on whatever date you want. Try to keep those comments in the context that they refer to very specific potential outcomes for the economy.

The real trick is anticipating when the tapering talk will turn serious. That question gets more interesting if President-elect Joseph Biden is able to get traction with his proposed $1.9 trillion relief package. The package includes boosting the recent rebates to $2,000, expanded child tax credits, raising the unemployment insurance enhancement from $300 to $400 a week through September, $350 billion for state and local, $20 billion for public transit, and additional goodies. That is a lot more stimulus coming down the pipeline into an economy that remains impaired by the pandemic such that households are in aggregate accumulating a vast portion of the aid as savings.

The Fed will react warmly to the package, or at least it should given Powell & Co. have been begging Congress for more fiscal stimulus. The Fed will signal an intent to effectively accommodate the fiscal push; they will not engage in a fiscal offset by bringing forward rate hike expectations. As Powell notes above, the Fed does not want to send any premature tightening signals. Moreover, the Fed will not raise interest rates until actual inflation hits 2% and it likely to remain modestly above 2%. We are a long way from seeing evidence of that.

That said, fiscal stimulus should further accelerate progress toward meeting the Fed’s goals, and such progress would trigger the Fed to rethink the asset purchase program. A bigger package now suggests more progress toward recovery which in turn suggests earlier tapering. It’s kind of hard to avoid that conclusion.

So is it six months or nine months or twelve months before the Fed starts talking about tapering again? I don’t know yet although being an optimist I would lean earlier than later. Powell is apparently an optimist as well:

You know, I remember coming back to the United States from an overseas trip in — near the end of February, really being concerned about the possibility of very, very horrible outcomes in the economy and in society. And it just — so we went to work. And Congress went to work, and you know, the people who invent vaccines went to work. If you — sitting here on January 14th of 2021, we are not living that downside case. I mean, I’ll always remember the discussions we had, which were pretty scary in March and April, and you know, we were doing the best we could. But here we are now with vaccines. The population’s getting vaccinated. And you know, you’re in a situation where we could be back to the — to the old economic peak fairly soon and passing it, and we may bypass a lot of the damage that we were concerned about to low- and moderate-income people, who by the way still have very high unemployment but with the reopening of the service economy later this year, we hope, will get back out there.

So I would say I’m optimistic about the economy over the next couple of years. I really am. We’ve got to get through this very difficult period this winter with the spread of Covid. But as the vaccines go out and we get Covid under control, there’s a lot of reason to be optimistic about the U.S. economy.

One final point. If the economy picks up speed quickly, it would be reasonable to expect some upward pressure on long-term interest rates. Would the Fed try to sit on the long-end of the curve? I think it depends on the situation. I suspect the most important consideration would be if the Fed thought market participants were correctly reading the Fed’s reaction function. Back to Powell today:

…since we announced the framework in August there’s plenty of evidence that market participants have shifted their expectation in — expectations in ways that are consistent with the new framework. Surveys now show that market participants expect us not to raise rates until inflation has reached 2 percent and until the labor market is very strong indeed, and that is also consistent with our rate guidance.

If the Fed believes higher long term rates were more about longer term growth prospects than the near term path of rate hikes, it probably wouldn’t be very concerned. The Fed though would react to higher rates that were driven by an inaccurate view of Fed policy, particularly if rates moved up quickly.

Bottom Line: Powell dropped the hammer on the tapering talk. Too early to talk about it. The baseline holds, no taper through this year. Eventually though more serious chatter will emerge. The more fiscal stimulus, the sooner the progress necessary for the Fed to start thinking of policy changes.