Quarles Seeks Taper Talk in Coming Meetings If U.S. Stays Strong

Bookmark

A key Federal Reserve policy maker said on Wednesday that it will be important for the central bank to begin discussing in coming months plans to reduce its massive bond purchases if the economy continues to power ahead coming out of the pandemic.

“If my expectations about economic growth, employment, and inflation over the coming months are borne out,” Fed Vice Chairman for Supervision Randal Quarles said, “it will become important for the FOMC to begin discussing our plans to adjust the pace of asset purchases at upcoming meetings.” He was referring to the Federal Open Market Committee.

The Fed is currently buying $120 billion of assets per month -- $80 billion of Treasury securities and $40 billion of mortgage backed debt -- and has pledged to keep up that pace “until substantial further progress” has been made toward its goals of maximum employment and 2% average inflation.

Quarles told a Brookings Institution webinar that the “substantial further progress” benchmark adopted by the Federal Open Market Committee posed inherent communication challenges because it can’t be boiled down to a single labor market metric.

“We may need additional public communications about the conditions that constitute substantial further progress since December toward our broad and inclusive definition of maximum employment,” Quarles said.

He added though that whatever metric is looked at -- be it the unemployment rate, the labor force participation rate, or the number of people underemployed -- the Fed is “still significantly short” of achieving substantial progress toward its maximum employment goal.

MBS Debate

Asked why the Fed is still buying mortgage-backed securities when house prices are rising at a good clip, Quarles conceded that was a “perfectly fair” question and said the issue would be discussed when policy makers begin to talk about plans to scale back their asset purchases.

“We’ll be certainly looking at it as we consider our asset purchase policy generally,” he said.

The comments by Quarles on the possible start of discussions on the Fed’s buying plans come on the heels of similar remarks on Tuesday by Fed Vice Chairman Richard Clarida.

While a bump in inflation this year is likely to be largely transitory, Quarles said the risks to inflation in the medium term are “weighted to the upside,” in part because of the stance of fiscal policy.

But he added, “I don’t want to overstate my concern. I am not worried about a return to the 1970’s.”

Declaring himself “quite optimistic” about the economic outlook, Quarles said he expects “rapid growth to continue for some time before slowing to a still robust pace next year.”

©2021 Bloomberg L.P.

BQ Install

Bloomberg Quint

Add BloombergQuint App to Home screen.