Inflation Prompts Growing Chorus to Call on Fed to Speed Taper

(Bloomberg) -- A growing chorus of market watchers is saying the Federal Reserve may have to speed up its reduction of asset purchases in light of the fastest inflation in 30 years.

The calls, ranging from former New York Fed President Bill Dudley to St. Louis Fed President James Bullard, are coming at a tricky time for the central bank, which only announced plans to reduce its bond-buying program less than two weeks ago, while noting it could tinker with the $15 billion monthly tapering pace if warranted. A week later, a report showed the consumer price index rose at the fastest annual pace since 1990.

That’s not to say the data-dependent Fed will react to just one inflation print, but it will see the November CPI report as well as the October reading of its preferred price gauge, the personal consumption expenditures index, before its December meeting.

Here’s what some have had to say:

Bill Dudley, former New York Fed president

“To change their mind, they have to accelerate the taper. They’re going to have to get the taper done quicker,” Dudley, an opinion columnist for Bloomberg and senior research scholar at Princeton University, said on Bloomberg Television Monday. 

However, doing so could be “problematic” because the Fed could stir a taper tantrum that it’s been trying to avoid, he said. 

Lawrence Summers, former U.S. Treasury secretary

“The Fed should signal that the primary risk is overheating and accelerate tapering of its asset purchases,” Summers said in a Twitter thread Monday. “Given the house-price boom, mortgage-related purchases should stop immediately.”

James Bullard, St. Louis Fed president

“If we had to, we could end the taper somewhat sooner,” Bullard said in an interview on Fox Business last week.

“We have done a lot to move the policy in a more hawkish direction. We can do more, but that will be data dependent. We will have to see how that comes in,” he said.

Jeffrey Lacker, former Richmond Fed president

“They’re on track to a major policy blunder,” Lacker, now an economics professor at Virginia Commonwealth University, said on Bloomberg Television Monday.

To avoid such an outcome and possibly risk a recession, “they need to pivot, recalibrate pretty rapidly. They need to accelerate the taper, get rate increases started earlier next year, in the first half, and they’re going to need some good luck.”

So-called breakeven rates surged after the Nov. 10 CPI report -- and have continued to move up in the days since. That’s as traders make their wagers that the Fed will hike rates sooner than expected, which the central bank has said would only occur once tapering is complete. Longer-term Treasury yields have also climbed in anticipation of faster rate increases, while stocks are so far unfazed. 

“The Treasury market is trying to get the Fed’s attention,” said Bill Zox, a high-yield bond portfolio manager at Brandywine Global Investment Management. “If the equity market joined in, the Fed would act quickly.”

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