Fed’s Bullard Wants Taper to Start in Fall, End by March ‘22
Federal Reserve policy makers should begin tapering of asset purchases in the fall and wind up the process by March in light of U.S. inflation running much higher than expected, Federal Reserve Bank of St. Louis President James Bullard said.
“My preference would be to get to a decision in September and start sometime after that,” Bullard told reporters on Friday after giving a virtual speech. “My main goal would be to get done by the end of the first quarter.”
The Fed has been buying $80 billion of Treasuries and $40 billion of mortgage-backed securities a month to help the economy heal from Covid-19 downturn. The Federal Open Market Committee reiterated at a meeting this week that purchases would continue until there’s “substantial further progress” on its goals for employment and inflation.
While Fed Chair Jerome Powell told a post-meeting press conference on Wednesday that there’s still a ways to go to meet the jobs benchmark, Bullard cited surging job openings and anecdotal reports of labor shortages as evidence of a tight labor market, while inflation has been rising amid supply chain disruptions.
“We should go ahead and get the taper going, get it behind us, so we would have some optionality to handle the possibility -- maybe not even the likelihood -- the possibility that inflation is more persistent and higher than we’d like,” Bullard said.
Bullard’s forecast calls for the first Fed interest-rate increase in late 2022, which is earlier than the median FOMC participant forecast for 2023. The St. Louis Fed official said completing the tapering quickly would give the Fed the option to raise interest rates earlier than that, if necessary, to counter inflation.
If the committee waits to start tapering bonds in 2022, which is when most economists expect, Bullard said, “I would say that is a risky strategy to wait that long -- you might have inflation running at an even higher level than you do today. I think you would get behind the curve. To me that is not the right risk management.”
In such a scenario, the committee might have to raise rates more quickly than it wants to catch up, which would be “disruptive” and risk causing a recession, Bullard said.
“The policy is very dovish today,” Bullard said. “You would have to raise the policy rate substantially to put downward pressure on inflation. That is the sense in which I think we are out of position.”
The U.S. seems to be recovering at a rapid rate from Covid, with vaccinations helping, and there’s not a likelihood that the delta variant will slow the recovery much, Bullard said.
While the Fed faced a so-called taper tantrum in 2013 when former Chair Ben Bernanke gave a hint of scaling back bond buying during an earlier round of purchases, financial markets have shown no fear of tapering and instead yields on Treasuries have fallen, the St. Louis Fed president said.
“They’ve been expecting it, and they don’t really think asset purchases are that effective in this environment,” Bullard said. Markets “are very much ready for the taper to go ahead this fall.”
Bullard’s timetable for reducing the purchases is considerably faster than has been suggested by other Fed officials or the plan expected by economists. In a survey prior to this week’s policy meeting, economists expected the committee would announce a tapering formally by December and start the taper in early 2022.
Bullard, who next votes on monetary policy in 2022, has sometimes been viewed as a bellwether for the FOMC and was the first to push for a second round of asset purchases coming out of the 2007-2009 recession. The committee eventually adopted that move.
Consumer prices are rising at the fastest pace since 2008 as the economy reopens and American renew spending after more than a year of lockdown. The key gauge that the Fed uses for its inflation target climbed 4% in June from a year earlier, the fourth straight month in which it exceeded the 2% goal.
“Inflation is going to moderate, but we don’t know how much it’s going to moderate, and if it doesn’t moderate then we’re going to have to gently bring inflation back down to 2%,” Bullard said. This is “a good time to get going and get the process finished at the end of the first quarter next year,” he said.
Bullard sees inflation slowing to a range of 2.5% to 3% in 2022.
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