- Taper Could Start Soon as Mid-November, End Mid-2022, Assuming More Progress
- FOMC Liked Staff Plan to Cut MBS $5 Billion, Treasuries $10 Billion Per Month
By Steven K. Beckner
(MaceNews) – Federal Reserve officials expressed heightened concern about inflation along with greater satisfaction with labor market improvements at the Sept. 21-22 meeting of the Fed’s policy-making Federal Open Market Committee, minutes released Wednesday show.
The minutes reveal that Fed officials broadly felt it would be appropriate to consider announcing a reduction of asset purchases “soon,” but that a “tapering” announcement should not be seen as a signal of impending increases in the federal funds rate.
The consensus was that, if the FOMC does decide to taper at the early-November meeting, reductions in bond buying should begin as early as mid-November and conclude by the middle of next year.
FOMC participants reacted favorably to a staff presentation on the pace of tapering proposing that purchases of Treasury securities be reduced by $10 billion per month and agency mortgage backed securities by $5 billion per month.
The minutes show officials debating whether “substantial further progress” had been made toward the Fed’s “maximum employment” and average 2% inflation goals relative to December 2020 – the FOMC’s standard for starting to scale back bond buying. While they were nearly unanimous in thinking that threshold had been met on inflation, they differed on whether it had been met regarding employment.
However, the minutes suggest that a majority thought that the employment progress standard either “had been met” or “may soon be reached.”
So, “all participants agreed that it would be appropriate for the current meeting’s post-meeting statement to relay the Committee’s judgment that, if progress continued broadly as expected, a moderation in the pace of asset purchases may soon be warranted,” say the minutes.
Although the FOMC left monetary policy unchanged on Sept. 22, its policy statement declared that “If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.”
Chairman Jerome Powell told reporters afterwards that he didn’t need to see a “blow-out” September employment report, just a “decent” one, to justify trimming bond buying at the Nov. 2-3 FOMC meeting. Since then other Fed officials have signaled they are ready to proceed despite disappointing September payroll gains.
Assuming, the FOMC does decide to taper on Nov. 3, Powell said it would likely finish the process by mid-2022, and he cautioned against interpreting tapering as a signal that the FOMC is about to raise the federal funds rate from near zero. Half of the 18 FOMC participants projected one or more rate hikes next year.
Inflation, which has continued to worsen since September, running in excess of 5% per year, was uppermost on the minds of Fed officials, even as they continued to focus on labor market concerns.
“In their discussion of inflation, participants observed that the inflation rate was elevated, and they expected that it would likely remain so in coming months before moderating,” say the minutes, which note that participants had “marked up their inflation projections, as they assessed that supply constraints in product and labor markets were larger and likely to be longer lasting than previously anticipated.”
What’s more, “some participants expressed concerns that elevated rates of inflation could feed through into longer-term inflation expectations of households and businesses or saw recent inflation data as suggestive of broader inflation pressures.”
There was also some concern about a potential wage-price spiral. “A few participants noted that there was not yet evidence that robust wage growth was exerting upward pressure on prices to a significant degree, but also that the possibility merited close monitoring.”
Officials also delved into whether inflation expectations were remaining “well-anchored” – the necessity of which Powell and others have often emphasized.
Some took comfort that various measures of longer-term inflation expectations, including TIPS- and survey-based measures, “had remained in ranges that were viewed as broadly consistent with the Committee’s longer-run inflation goal, or that the distribution across households of longer-term expected inflation had remained stable over the past two years.”
However, many noted “the substantial rise in one- and three-year measures of inflation expectations in the Federal Reserve Bank of New York’s Survey of Consumer Expectations or in the one-year measure in the University of Michigan Surveys of Consumers.”
On the whole there was greater concern about inflation overshooting the Fed’s 2% target more than desired than there was about inflation falling short of that goal. “Most participants saw inflation risks as weighted to the upside because of concerns that supply disruptions and labor shortages might last longer and might have larger or more persistent effects on prices and wages than they currently assumed.”
In discussing whether enough “progress” that had been achieved to start trimming bond purchases, the minutes say, “most participants remarked that the standard of ‘substantial further progress’ had been met with regard to the Committee’s price-stability goal or that it was likely to be met soon.”
Regarding the “maximum employment” goal, there was much less unanimity or certainty. The minutes say “participants cited the progress recorded in a number of individual series, including, among others, the employment-to-population ratio, the unemployment rate, claims for unemployment insurance, job openings, nominal wage growth, and increases in payrolls, as well as in summary measures of the labor situation.” But it was noted that “progress on labor force participation was lagging.”
But it’s clear from the minutes that most FOMC participants saw sufficient progress on the jobs front to justify tapering before long.
“Many participants noted that although the economic recovery had slowed recently and the August increase in payrolls had fallen short of expectations, the labor market had continued to show improvement since the Committee’s previous meeting,” the minutes report.”
“A number of participants assessed that the standard of substantial further progress toward the goal of maximum employment had not yet been attained but that, if the economy proceeded roughly as they anticipated, it may soon be reached,” they continue. “On the basis of the cumulative performance of the labor market since December 2020, a number of other participants indicated that they believed that the test of ‘substantial further progress’ toward maximum employment had been met.”
There was acknowledgment that a major impediment to further labor market improvement was not lack of demand but “labor supply constraints,” with many firms having trouble coaxing Americans to take jobs, forcing them to curtail hours and/or raise wages.
But that is not a problem the Fed can solve through continued quantitative easing or zero interest rates, some Fed officials warned. “They noted that adding monetary policy accommodation at this time would not address such constraints or that the costs of continuing asset purchases might be beginning to exceed their benefits.”
So it was agreed tapering “may soon be warranted.”
The FOMC then considered “how slowing in the pace of purchases might proceed,” drawing on “an illustrative path” provided by the Fed Board staff, which the minutes say “was designed to be simple to communicate and entailed a gradual reduction in the pace of net asset purchases that, if begun later this year, would lead the Federal Reserve to end purchases around the middle of next year.”
The proposed monthly purchase reductions of $10 billion in Treasuries and $5 billion in MBS was seen by FOMC participants as providing “a straightforward and appropriate template that policymakers might follow.”
A couple of participants observed that “giving advance notice to the general public of a plan along these lines may reduce the risk of an adverse market reaction to a moderation in asset purchases.”
Fed officials commented that the FOMC “could adjust the pace of the moderation of its purchases if economic developments were to differ substantially from what they expected.”
The minutes say “several participants indicated that they preferred to proceed with a more rapid moderation of purchases than described in the illustrative examples.”
Although the FOMC did not decide to announce tapering on Sept. 22, the minutes say “participants generally assessed that, provided that the economic recovery remained broadly on track, a gradual tapering process that concluded around the middle of next year would likely be appropriate.”
And the minutes add that “if a decision to begin tapering purchases occurred at the next meeting, the process of tapering could commence with the monthly purchase calendars beginning in either mid-November or mid-December.”
The minutes reemphasize the point repeatedly made by Powell that tapering should not be construed as a signal that the Fed is about to “lift off” from the zero lower bound for the funds rate. “Participants reaffirmed that the Committee’s ‘substantial further progress standard regarding its asset purchases was distinct from the criteria given in its forward guidance on the federal funds rate and that a policy shift toward a moderation of asset purchases provided no direct signal about its interest rate policy.”
“Rather, the Committee had articulated a different, and more stringent, test concerning the conditions that would need to be met before it started raising the target range for the federal funds rate,” the minutes add.
The minutes say “various participants stressed that economic conditions were likely to justify keeping the rate at or near its lower bound over the next couple of years.”
While “several” officials warned of a return to disinflationary pressures and a return to undershooting of the Fed’s target, the predominant fear seemed to be of overshooting.
Officials warned that “upside risks” to inflation “included the possibility that elevated levels of inflation would continue for longer than expected, especially if labor and other supply shortages proved more persistent than currently anticipated, or that longer-term inflation expectations might move above levels consistent with the Committee’s longer-term inflation objective of 2%.”
“Additional expansionary fiscal actions” were seen as potential spur to inflation.
The minutes also say “several participants expressed concern that the high degree of accommodation being provided by monetary policy, including through continued asset purchases, could increase risks to financial stability.”