Fed policymakers focus on November taper timeline as Fed officials work on it
Oct 12, Three U.S. Federal Reserve policymakers said the economy has healed sufficiently for the central bank to begin withdrawing its crisis-era support, confirming fears that the Fed will begin to taper its monthly bond purchases as soon as next month.
"I personally believe that the'substantial further progress' standard has been met with respect to our price-stability mandate and has all but been exceeded with regard to the employment mandate," Fed Vice Chair Richard Clarida told the Institute of International Finance virtual annual meeting.
He was referring to the Fed's promise to keep buying $120 billion in Treasuries and mortgage-backed securities each month until the economy had met that standard on both of its mandates.
At their last meeting, Fed policymakers agreed that tapering "may soon be justified" and would likely be completed by the middle of next year, he added.
Clarida's upbeat assessment likely echoes those of his boss, Fed Chair Jerome Powell, who previously said he only needed to see a "decent" September U.S. jobs report to be ready to begin to taper bond purchases in November.
Clarida noted that the epidemic continues to weigh on employment and participation, although he added that "the economy has strengthened and "conditions in the labor market have continued to improve."
Both Atlanta Fed President Raphael Bostic and St. Louis Fed Chairman James Bullard said they also supported a November start in separate appearances on Tuesday.
"I think that the progress has been achieved, and the sooner we get moving on that, the better," Bostic said in an interview with the Financial Times.
Bullard, speaking on CNBC, stated he wants to have the taper finished by the first quarter of 2022 so that if inflation stays high or rises even more, the Federal Reserve may raise rates "in the spring or summer... unless we had to do so."
But he added that such a move does not have to come at the cost of gains in the labor market.
A Labor Department report showed that employers added a lesser-than-expected 194,000 jobs last month. Bullard said he expects growth to rise in the fourth and first quarters, pushing the unemployment rate below 4% and to pre-pandemic levels by the spring.
The unemployment rate, according to a benchmark Friday's report, had fallen to 4.8% by the end of this year, as policymakers at their last meeting reported.
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In March 2020, the Federal Reserve began buying bonds as part of its emergency response to the COVID-19 epidemic to stabilize financial markets and keep borrowing costs low.
Bostic said at a virtual event hosted by the Peterson Institute for International Economics that financial markets now have plenty of liquidity, reducing the risk that easing the purchases will have an adverse effect on markets or the economy. "I actually think the economy has a lot of positive momentum," Bostic said.
Despite the recent rise in COVID-19 cases, Bullard stated that the economy is in "excellent shape" even though COVD19 cases slowed growth last quarter.
Americans have at least $2.5 trillion in excess savings accumulated during the epidemic, and consumer spending remains steady in the United States. Economic output has rebounded higher than pre-pandemic levels; consumers are saving at most $2.4 trillion. Bond purchases most significantly influence demand, while economies around the world are battling with labor and goods shortages.
Indeed, the rise in demand as the U.S. economy reopened has resulted in a sharp increase in inflation, with persistent supply constraints expected to keep price increases well below the Federal Reserve's 2% inflation target through the end of the year and into 2022. That has sparked fears of a 1970s-style "stagflation," where economic growth grinds to halt but inflation continues to rise.
Fed policymakers on Tuesday said that's not their expectation.
"The big unknown right now is how long it will take for these bottleneck effects to disappear," Clarida said in a question and answer session, but the expectation is that they will vanish. "My baseline case is not for stagflation over the medium term," says the economist.
And though some analysts have suggested that rising inflation might force the central bank to raise interest rates from near zero before the labor market heals, Clarida and other policymakers dismissed that possibility.
"The risks to inflation are to the upside," Clarida acknowledged, but he added that the upward impulse is "transitory," with inflation expectations grounded and rising wages not causing a worrying upward price spiral.
Bostic for his part joked that anyone using the word "transitory" to describe inflation must put $1 in a swear jar at his bank, since the current climax of rising prices is far from over.
Still, he added, "we don't expect high inflation to persist or cause a long-term economic harm that would seriously challenge our policy stance on interest rates."
It will be more than a year before the central bank will have to raise rates from near zero, he added.