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A majority of Federal Reserve officials believe the US central bank could start withdrawing a massive pandemic stimulus programme later this year, according to a record of their latest meeting.
Minutes from the July meeting of the Federal Open Market Committee showed that officials had accelerated discussions on an eventual end to the $120bn-a-month asset purchase programme that has been in place since the onset of the Covid-19 economic crisis.
The record showed that Fed officials were inching towards a consensus on when to start “tapering” its bond-buying programme, which the central bank has pledged to keep in place until it sees “substantial further progress” on its goals of average 2 per cent inflation and maximum employment.
“Most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year,” according to the minutes.
The minutes showed that most committee members were “satisfied” that the inflation goal had been met but were not yet convinced the employment target had been achieved.
Growth has rebounded sharply from the worst of the economic contraction last year, driven by buoyant consumers, while supply constraints have fuelled a pick-up in inflation well beyond the level that policymakers and economists had initially expected.
At the same time, the spread of the more contagious Delta coronavirus variant has rekindled concerns about the labour market recovery, which has progressed more slowly in part due to pandemic fears and childcare issues that are discouraging people from returning to the workforce.
Officials were still divided on the exact timing and pace of tapering the bond-buying programme, the minutes indicated, with some participants hinting that a move could be warranted “in coming months”.
However, “several others” suggested postponing the kick-off of tapering until early next year due to an uncertain economic outlook.
Last month, Jay Powell, Fed chair, said “there’s a range of views on what timing will be appropriate”.
Eric Winograd, senior economist for fixed income at AllianceBernstein, said a taper set to start in December was still the most likely option, adding: “Perhaps if the Delta variant weren’t circulating, you could talk about September.”
In the weeks since July’s policy meeting, at which the Fed kept its main interest rate on hold close to zero, several top officials have expressed differing views on the pace of tapering the stimulus.
Eric Rosengren of the Boston Fed is among those backing a faster retreat, telling the Financial Times this week that he would support a taper announcement next month and the central bank ceasing to purchase Treasuries and agency mortgage-backed securities by the middle of 2022.
James Bullard of the St Louis Fed, who will alongside Rosengren become a voting member of the policy-setting committee next year, also said earlier on Wednesday that he wanted the process to be wrapped by the first quarter of next year, in anticipation of an interest rate increase at some point during the final three months of 2022.
Not all officials take such a “hawkish” view. While Mary Daly, president of the San Francisco Fed, recently told the FT that the central bank’s thresholds to start reducing its bond purchases could be reached by the end of the year, she made the case for more progress on the labour market front.
“Those who want to go fast are worried about the risks in the market about having so much accommodation out there,” said Lynda Schweitzer, co-head of the global fixed income team at Loomis Sayles. “Those that want to go slow are a bit afraid of disrupting the market with the Delta variant and supply disruptions [looming].”
Despite these divisions, Fed officials appear to have forged some agreement on critical aspects of the tapering process.
The minutes suggested broad-based acceptance that the central bank should taper its purchases of government bonds and mortgage-backed securities so that both programmes conclude at the same time. Some observers had suggested the MBS programme could be wound down more quickly.