With Fed’s Powell renominated, focus turns to speed of bond-buying taper
As Federal Reserve Chair Jerome Powell looks forward to four more years at the helm of the world’s most powerful central bank, attention is turning to whether he and his fellow policymakers will have to wean the U.S. economy off emergency support faster in the face of high inflation.
In renominating Powell a second term as Fed chief on Monday, U.S. President Joe Biden made plain that both the administration and the central bank would take steps to tackle the soaring costs of everyday items, including food, gasoline and rent. Inflation in October rose at its fastest annual pace in 31 years, testing the Fed’s working assumption that the COVID-19 pandemic-induced burst would be temporary.
The extent of debate among Fed policymakers on how quickly they should do away with their monthly asset purchase program could emerge on Wednesday when the central bank publishes minutes of its latest policy meeting.
Fed officials agreed at the Nov. 2-3 meeting to begin reducing the $120 billion in monthly purchases of Treasuries and mortgage-backed securities – a program introduced by the Fed in 2020 to help nurse the economy through the pandemic – with a timeline that would see them tapered completely by next June.
But they left open the possibility that the pace of the slowdown in asset purchases could be altered, and eyes are now fixed on what would necessitate a speedier withdrawal.
“The meeting minutes will be closely scrutinized over how high the bar is to adjust the pace of tapering,” said Sam Bullard, a senior economist at Wells Fargo (NYSE:WFC).
A faster taper plan at the Fed?
Since the November meeting, economic data has shown a reacceleration in job gains and a surge in retail sales, but most striking has been the degree to which inflation has failed to ebb as Powell and many others at the Fed had expected. The Labor Department’s benchmark for consumer price inflation shot up to a 6.2% annual pace last month, and Commerce Department data due Wednesday morning is expected to show another measure of price increases – favored by the Fed – continuing to run at better than twice the central bank’s 2% flexible average goal.
Investors are now betting the Fed will have to raise interest rates three times next year, with some markets reflecting the kickoff to higher borrowing costs coming as early as May.
The policy meeting readout on Wednesday will also likely provide more details on the depth of ill-feeling on inflation among policymakers, most of whom spent the first part of the year insisting the surging prices would be short-lived as supply-chain wrinkles were ironed out as the economy reopened.
“In May it was easy to dismiss, but with each passing month they are taking it more seriously. And they probably feel more comfortable acting given the improvement of the labor market … full employment is closer on the horizon,” said Michael Feroli, chief U.S. economist at JPMorgan (NYSE:JPM).
Fed Vice Chair Richard Clarida, who will be replaced by Lael Brainard, a current member of the Fed’s Board of Governors, early next year when his term expires, indicated last week that discussion of speeding up the bond-buying taper to give greater flexibility on how early to raise the central bank’s benchmark overnight interest rate from its current near-zero level will be on the agenda at the Dec. 14-15 policy meeting.
That was the latest sign that policymakers are now deeply attuned to the path of inflation pressures, which have intensified and broadened, causing a headache for Powell, who reworked the Fed’s policy framework last year to prioritize its maximum employment goal.
Powell, who would begin his second term as Fed chief in February if his renomination is confirmed by the U.S. Senate, still expects inflation to dissipate by the end of next year, though he noted, while standing alongside Biden at the White House on Monday, that the Fed is keenly focused on price pressures.
“We know that high inflation takes a toll on families, especially those less able to meet the higher costs of essentials,” Powell said.
St. Louis Fed President James Bullard and Fed Governor Christopher Waller called on the Fed last week to withdraw its bond-buying support more quickly, by March and April, respectively.
Some other more patient policymakers have suggested they are now more comfortable with an interest rate rise earlier next year than previously anticipated, noting that the current pace of job gains would put the Fed on track to be near or at its maximum employment goal by the middle of 2022.
On the other end of the spectrum is San Francisco Fed President Mary Daly, who argues that supply-chain disruptions will subside next year and that raising interest rates too quickly would slow progress in the job market and hurt millions of Americans.
“Maybe the compromise they can make is we don’t have to go overly early or aggressively on raising rates but we do taper a little faster,” said Kathy Bostjancic, chief U.S. financial economist at Oxford Economics, who notes that inflation is not expected to peak until the first quarter of next year before subsiding.
“In the meantime, what the Fed has to worry about is: Does this feed into wage and inflation expectations? If that is the case, then they do need to move more quickly,” she added.