Around half the members of the Federal Open Market Committee (FOMC) said December is the most likely time for the Federal Reserve to start reducing its purchases of Treasury and mortgage securities, according to minutes released from the central bank’s September meeting.
The purchases have supported the economy through the Covid-19 pandemic and the fact that Fed members are willing to remove the support signals that the economy is improving.
However, the committee remains somewhat divided on the timing and pace of the removal with some advocating for a mid-November start time.
The committee said a possible path to tapering includes reducing its current $80bn (£58.7bn) per month pace of Treasury purchases by $10bn per month over an eight-month period until the purchases are reduced to zero by July of 2022. Likewise, the Fed would reduce its pace of $40bn of agency mortgage-backed securities per month by $5bn per month over the same span.
Members noted the pace of tapering could slow if economic conditions deteriorate from their current estimates, while others advocated for more rapid removal of support.
Federal funds rate
Tapering of bond purchases is the first step toward eventually raising federal funds interest rates above their current near-zero levels.
Member survey data released after the September meeting showed half the members anticipate the first raise could come as early as next year with multiple rate hikes expected by 2023.
“A number of participants raised the possibility of beginning to increase the range by the end of next year because they expected that the labour market and inflation outcomes specified in the committee’s guidance on the federal funds rate might be achieved by that time,” according to notes from the September meeting.
By contrast, other members stressed that economic conditions were likely to justify keeping the rate at or near the lower end of its expected range over the next couple of years, noting the economy was still well below maximum employment and that they expect sustained downward pressure on inflation in the years ahead.
All the members agree that the bar for raising interest rates is much higher than it is for tapering asset purchases and that the economy is still some ways away from that high bar.
The committee reaffirmed that near-term inflation is expected to be higher.
Indeed, on Wednesday morning the US Bureau of Labor Statistics reported inflation data for September that showed consumer prices continue to increase at faster rates than analysts expected. The Consumer Price Index (CPI) jumped 0.4% after rising 0.3% in August. On a year-over-year basis, prices are up 5.4% versus estimates of 5.3%.
In September, the FOMC said there was more risk inflation could continue to rise with supply bottlenecks that have plagued companies large and small. Some Fed officials worried these inflation rates could lead to persistently elevated inflation in the long-run projections for households and businesses.
Several other participants pushed back against those suggestions of longer-run inflation noting the largest contributors to the recent elevated measures of inflation were a handful of Covid-related, pandemic-sensitive categories in which specific, identifiable bottlenecks were at play.
“This observation suggested that the upward pressure on prices would abate as the Covid-related demand and supply imbalances subsided,” according to the notes.