One Neat Trick to Figure Out When the Fed Will Taper

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Stable prices, full employment — and vaccination rates. Given the vast sums central banks have pumped into the global economy since the pandemic began, it’s only prudent to look beyond traditional metrics when considering whether to dial back. 

James Bullard, president of the Federal Reserve Bank of St Louis, recently told Bloomberg Television's Kathleen Hays that getting three-quarters of Americans vaccinated would signal that the pandemic is ending, a necessary condition to consider tapering bond purchases. At first glance, it sounds like mission creep, at a time when central bankers are already under intense scrutiny for their expansive role in the crisis. The idea also comes just months after the Fed revised the strategy for hitting its elusive inflation goal, by allowing — if not encouraging — the pace of price increases to overshoot. Is Jerome Powell toying with a new threshold for adjusting course, or is one official just riffing? 

It would be wrong to infer that Bullard’s comments necessarily reflect the center of gravity on the Federal Open Market Committee, which makes decisions about interest rates. A decade in Washington taught me that only a few people at the institution truly matter, and some of those are staffers, not FOMC members. Bullard is nevertheless an engaging and original thinker, and it’s precisely these moments when we need a broader approach to calibrating policy than the Index of Personal Consumption Expenditures — the Fed’s preferred gauge of inflation — or the monthly jobs report. The trajectory of the virus is a vital factor, one that started to get lost as people felt emboldened by the vaccine rollout. The predominant noise from markets the past few months has been devoted to climbing global bond yields and the idea that inflation will bounce too high from a very low floor. 

While the time for contemplating some withdrawal of monetary support hasn't arrived, the start of conversations about how to do so, and avoid investor panic, might be on the not-too-distant horizon. Yet central bankers the world over don’t have much experience pulling back from quantitative easing. They’re more comfortable assessing how to nudge up or down nominal interest rates, something that seems almost quaint these days. 

It’s in this relative vacuum that Bullard’s comments resonate. The European Central Bank and Bank of England should take note, as well as the handful of institutions in Asia that have adopted unconventional tools to buttress their economies. “There is a de facto pandemic test for the next policy decisions... even if it does not take the exact form the Fed’s Bullard has proposed,’’ Krishna Guha of Evercore ISI, who used to work at the Fed, wrote in a recent note.   

Implicit in bullish projections for growth globally is that stimulus will turbocharge the recovery once people and businesses feel free to return to some semblance of normal. Much focus is on the U.S., where the economy is forecast to have its best year since 1984.

The vaccination schedule is central to these considerations. Anyone thinking that Covid infections have become passe just needs to look around: Japan is poised to reimpose states of emergency in the most economically important cities, and numbers are surging in developing countries, where the vast majority of the world’s population resides. Cases are climbing to alarming levels in India, Brazil, Turkey and Argentina. 

Those who have lost sight of the virus would be wise to heed Bullard. The Fed might not take his suggestions on board, but at least he has identified the problem. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.

©2021 Bloomberg L.P.

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