— If Speed Tapering in January; Could Raise Funds rate in Second Quarter
By Steven K. Beckner
(MaceNews) – Federal Reserve Governor Christopher Waller said Friday he is leaning toward a “faster” pace of “tapering” Fed asset purchases, and he suggested he would also favor a relatively early “liftoff” of the federal funds rate from its current near zero target.
“I believe that policy may need to pivot to a faster taper based on incoming data that I will be monitoring,” he told the Center for Financial Stability,
Were the Fed to speed up the pace of reductions in bond purchases, it could be finished by April and start raising rates in the second quarter,” he said.
Waller expressed heightened concern about rising inflation and inflation expectations and said that if wage-price pressures do not moderate, the Fed’s policy making Federal Open Market Committee will need to tighten credit through more rapid tapering and/or quicker increases in the funds rate.
Whenever the Fed completes its asset purchase program, Waller said the Fed should consider shrinking its balance sheet in the same way it did in the 2017-19 period – by gradually reducing its reinvestments and rollovers of maturing securities.
Waller joined with other members of the FOMC Nov. 3 to start scaling back Fed bond buying by $15 billion per month until the asset purchase program ends. The FOMC said it is prepared to adjust the pace of purchases, but Chairman Jerome Powell said tapering is likely to be wrapped up by mid-2022. The FOMC left the federal funds rate in a zero to 25 basis point target range and said it expects it to remain there “until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.”
Waller was upbeat about the economy, saying it is “making steady progress toward the Federal Reserve’s goal of maximum employment” and projecting that GDP will “resume its robust growth not only in the fourth quarter of 2021 but also in the first half of 2022,” assuming no worsening of the pandemic.
However, he had much greater concern about the Fed’s price stability mandate. “Due to a combining of those supply constraints with strong demand, inflation pressures are becoming more widespread and may last longer into 2022 than I thought they would,” he said in remarks prepared for delivery.
“These factors haven’t dented my optimism that the strong recovery will continue but they have raised the risks that supply constraints may limit job gains and output growth, and that inflation may complicate the FOMC’s management of monetary policy in 2022,” he continued.
Waller said “inflation has escalated substantially this year, along with a significant rise in inflation expectations.” He noted the October Consumer Price Index rose at “an annualized rate exceeding 10% and that “even trimmed mean measures of inflation that exclude some big price increases …. report inflation rates above the Fed’s 2% target.”
What’s more, “wages continue to grow quickly on a more sustained basis than they have in more than 20 years,” he added.
“Crucial to the path of inflation will be whether we see input cost increases consistently reflected in final goods prices,” Waller went on, noting that “companies are comfortable passing along these cost increases to their customers.”
Inflation expectations are another major concern for Waller.
“I hope these large movements in inflation expectations are – wait for it – transitory and will come back down as bottlenecks and labor shortages resolve themselves over the coming months,” he said. “But if these measures were to continue moving upward, I would become concerned that expectations would lead households to demand higher wages to compensate for expected inflation, which could raise inflation in the near term and keep it elevated for some time. This possibility is a risk to the inflation outlook that I’m watching carefully.”
Responding to a question, Waller said he is “very worried” about rising inflation expectations, warning that if higher inflation “gets embedded in household expectaions” they could fuel higher wage demands, leading to higher prices and so forth in a vicious circle.
So Waller made clear he will be pushing for a more urgent response to wage-price pressures than a “patient” Chairman Jerome Powell has thus far been willing to advocate.
“If the economy makes quick progress toward maximum employment or inflation data show no signs of retreating from their currently high readings, the Committee may choose to speed up the taper, which would position it to accelerate subsequent steps in tightening monetary policy if necessary,” he said.
“The timing of any policy action is a decision for the FOMC, but for my part the rapid improvement in the labor market and the deteriorating inflation data have pushed me towards favoring a faster pace of tapering and a more rapid removal of accommodation in 2022,” he added.
In response to questions, Waller was more emphatic, asserting he favors a “faster” pace of tapering followed by an earlier liftoff than many of his colleagues have projected.
Waller differed with his former boss, St. Louis Federal Reserve Bank President James Bullard, who recently suggested raising the funds rate before the end of tapering. “From a conceptual level, if you’re still buying assets and then start raising rates they don’t seem to line up.”
Instead, “my preference would be to go early and go fast…,” he said. “I lost the ‘go earlier’ (argument), but we could still go faster.”
“If we double the pace (of tapering) in January we could be done by April,” and “we could have a rate hike as early as the second quarter,” he continued. “That’s a theroetical possiblity.”
Waller stressed it is vital to maintain the Fed’s antii-inflationary “credibility.”
At the same time, Waller expressed hope that just “the threat” of higher rates will preclude the need to actually move the funds rate into restrictive territory. “If we do our job right,” merely projecting the path of rates will bring inflation back down, and “I hope we never actually have to implement” restrictive rates.
Beyond tapering and liftoff, Waller looked ahead to the eventual need to shrink the Fed’s blaoted balance sheet. He suggested a similar approach to what the FOMC had employed before the pandemic shutdowns prompted the FOMC to reverse itself.
“Going forward, the Committee will need to decide what type of reinvestment policy to have in place..” he said. “Based on past experience, an effective way to gradually reduce the balance sheet to a more efficient level is to change that reinvestment policy to limit, or cease, reinvestment.”
“I expect the reinvestment strategy will be heavily influenced by the Fed’s experience with this policy between 2017 and 2019,” he elaborated. “During that time, the FOMC recognized that the monthly maturity of securities was lumpy; some months there were many securities maturing, and others few.”
“The FOMC ensured a gradual and predictable roll-off of securities that allowed market participants to plan for the Fed’s gradual retreat from the Treasury and MBS markets, which was done by instituting monthly redemption caps that gradually increased over time,” he went on. “I would support a similar process when the time comes to alter reinvestment policy.”
Contact this reporter: steve@macenews.com
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