Federal Reserve policymakers are speeding up their timeline on withdrawing monetary stimulus, as even the dovish head of the San Francisco Fed, Mary Daly, says the central bank could start reducing its bond purchases before the end of the year.
“Talking about potentially tapering those later this year or early next year is where I’m at,” Daly said in an interview with the Financial Times.
Daly cited the increasing momentum of the economic rebound in the U.S. as the addition of 943,000 jobs in July cut the unemployment rate to 5.4% from 5.9%.
This is not a surprise as economists—and the Federal Reserve System has hundreds of them—have been forecasting a robust recovery for months. Members of the Federal Open Market Committee kept dragging their feet, however, as Fed Chairman Jerome Powell insisted that substantially more progress was needed before they could talk about tapering.
Increasing Inflation Concerns
The current shift in policy is more likely due to increasing concern about inflation, as it shows little sign of abating. The consumer price index registered a year-on-year increase of 5.4% in July, a notch above the 5.3% increase expected and the same as June’s 5.4% increase.
A Fox News poll last week showed 86% of voters surveyed are concerned about inflation, with most of them blaming the COVID-19 pandemic but nearly four-fifths, 79%, also blaming government policies.
Kansas City Fed chief Esther George, a hawk on the FOMC, also found that a recovering labor market and "firm inflation expectations fulfilled the Fed’s objectives for starting to withdraw monetary stimulus.
“I support bringing asset purchases to an end under these conditions,” she said in a speech last week to the National Association for Business Economics.
Robert Kaplan, president of the Dallas Fed, said last week that policymakers should announce the tapering of bond purchases in September and start with it already in October. In a recent television interview, Kaplan remarked:
“The reason I’m saying we ought to begin the tapering soon is I think these purchases are very well equipped to stimulate demand. But we don’t have a demand problem in the economy. My thought is I’d rather take the foot off the accelerator soon and reduce the RPMs.”
Tapering could take eight months, Kaplan said, and should be separate from any decision to raise interest rates.
FOMC Objectives Nearly Met; Other Central Banks Head Toward Hikes
Atlanta Fed chief Raphael Bostic allowed that the current inflation rate fulfilled the Fed’s objective of getting it to 2%. According to his calculations, the much tamer five-year average for the core personal consumption expenditures rate reached 2% in May.
Thomas Barkin and Eric Rosengren, head of the Fed regional banks in Richmond and Boston respectively, chimed in with similar remarks last week. These echoed comments made in the previous week by two members of the Washington-based board of governors, Richard Clarida and Christopher Waller.
Long story short: Those elusive and vague objectives the Fed has been aiming at are very nearly attained.
Other central banks are more decisive than the Fed. The Reserve Bank of Australia said it would go ahead with its plan to start tapering asset purchases next month in spite of new lockdowns in Sydney and Melbourne due to a new wave of COVID-19 infections.
RBA Governor Philip Lowe said the lockdowns will slow growth, but he expects economic momentum to resume once the new outbreaks are contained.
The Bank of England’s Monetary Policy Committee held its key rate at 0.1%, but said a modest increase in rates might be coming already next year as growth barrels ahead and inflation is running warm. Growth was forecast at 8% for this year, up from 7.25% predicted in May, and analysts said interest rate hikes might come as soon as next spring.