Fed Officials See Strong U.S. Rebound, Fanning Talk of Taper

(Bloomberg) -- Federal Reserve officials said that more fiscal support and the mass distribution of vaccines could lead to a strong U.S. economic recovery in the second half, setting the stage for a discussion of potential tapering of bond buying before year’s end.

“I do think you’re looking at a second half that is going to be very strong and the question I think is how do we get through where we are today to that second half,” Fed Richmond Bank President Thomas Barkin, who votes on monetary policy this year, told CNBC in an interview Monday.

The Fed last month signaled interest rates would stay near zero at least through 2023 and said it would keep buying bonds at a $120 billion monthly pace until it has seen “substantial further progress” toward its goals for employment and inflation.

“I’m open to that” potential late-2021 tapering, Fed Atlanta Bank President Raphael Bostic told reporters after a speech earlier in the day. “A lot of it will depend on how the virus and the vaccine distribution goes. But if it goes well -- if we learn quickly -- I think there is some good upside potential.”

Bostic said growth could turn out to be stronger than expected, which he noted could lead to a discussion of raising rates in the second half of 2022 or 2023 -- earlier than other policy makers are forecasting.

Dallas Fed chief Robert Kaplan, speaking later on Monday, said he was hopeful the economy would rebound sufficiently to at least allow the conversation about tapering to begin later in 2021.

“I don’t want to prejudge right now -- while we’re in the teeth of the pandemic -- when we’re going to get there. But I would hope it might be this year,” he told a virtual town hall hosted by his bank. Kaplan said he sees U.S. growth around 5% this year.

Barkin wouldn’t predict a date but sounded optimistic about the U.S. outlook, while acknowledging the early part of the year would be weakened by the continuing Covid-19 crisis. Still, fiscal support and an elevated savings rate would create backstops for the economy, he said.

“We’ve given outcome guidance, not date guidance so I couldn’t tell you the day. I do think this notion of ‘substantial further progress’ is the right way to think about it,” he said. “So there are scenarios certainly where we see strong recovery in unemployment and inflation, but there are lots of scenarios where we don’t.”

“Unemployment was 6.7% when we gave that guidance, inflation was 1.4%. It is still both in the same place,” Barkin said, referring to the Fed’s description of when it would adjust bond buying. “I think you would need to see substantial progress against those numbers toward our goals before the discussion gets on the table.”

Taper Tantrum

Fed officials have stressed that tapering of bond buying would be communicated well in advance to avoid a surge in Treasury bond yields. Vice Chair Richard Clarida said Friday he doesn’t expect the central bank to begin tapering its asset purchases this year despite an expected strengthening of the economy.

The debate recalls the 2013 taper tantrum, when the unexpected disclosure by then-Fed Chairman Ben Bernanke that officials were thinking about dialing back their asset purchases provoked violent financial market volatility. Barkin made clear that they did not want a repeat.

“I think we have learned lessons certainly from six or seven years ago,” he said, noting that Fed Chair Jerome Powell was at the central bank during that episode. “I expect us to do our best to communicate well there.”

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