The Federal Reserve plans to start reducing its purchases of US Treasuries in November by $10 billion a month and at the same time trim its acquisition of mortgage-backed bonds by $5 billion a month, aiming to complete the reduction in eight months, by mid-2022.
This is the so-called “illustrative” path detailed in the minutes of the September 21-22 meeting of the Federal Open Market Committee released last week. Cloaking the plan with the word illustrative simply means that barring any unforeseen data, this is what the Fed will do.
In the cryptic formulation favored for the minutes:
“Several participants indicated that they preferred to proceed with a more rapid moderation of purchases than described in the illustrative examples.”
In other words, if inflation continues to heat up, the FOMC may decide to move more quickly to taper the asset purchases. However, the minutes reiterated the committee’s belief that eventual interest-rate hikes are a separate matter, and it may well be a couple of years before they’re ready to take that step.
Or maybe not. For now, however, the FOMC is on a glide path to end asset purchases, while the question of interest rates is up in the air.
Inflation More Persistant Than Originally Assumed
The minutes and the official statement continued to speak of “maximum employment” as a distant goal, despite mounting evidence that a lot of people have no intention of coming back to work anytime soon and we may well be very near the post-pandemic maximum.
In the meantime, policymakers are slowly coming to the realization, as the minutes coyly put it, that the causes of inflation could be more persistent “than they currently assumed.”
Ain’t that the truth.
The New York Times last week noted an alarming increase in rents as home ownership eludes renters amid housing shortages and skyrocketing prices. Housing is a big component of the consumer price index, which showed a 5.4% increase on the year in September.
St. Louis Fed chief James Bullard dropped the minutes’ cloak of anonymity when he told CNBC last week that he was one of those who wanted “more rapid moderation” of the bond purchases, recommending the taper process end in the first quarter so the Fed could proceed to raising interest rates next year.
The International Monetary Fund warned last week that inflation could be more persistent than anticipated, cautioning central banks to be ready to raise rates if necessary to clip its wings. Bank of England Governor Andrew Bailey signaled again he is ready to raise rates as energy shortages are adding to inflationary pressures.
Rapidly increasing oil and gas prices are just one of the many factors conspiring to keep inflation from being transitory, but for some reason central bank policymakers maintain their idée fixe that this is all temporary.
Former Treasury Secretary Larry Summers criticized Fed policymakers for what he called their “wokeness”—a focus on social issues—instead of moving decisively to curb inflation.
“They’re defining themselves by how socially concerned they are,” he said at an event for the Institute of International Finance. The longer they wait, he suggested, the more shocking it will be when they are finally forced to act.
Fed economist Jeremy Rudd published a paper last month questioning policymakers’ widely held assumption that inflation expectations are what drives price increases and their current absence means the inflation we see before our eyes is transitory.
In the same vein, the Nobel Prize in economics went to three economists who have advocated for natural experiments, that is, that economists don’t slavishly follow their models and tweak their assumptions to make them work. Rather, they observe empirical data and draw the appropriate conclusions, like every other science.
Fed Chairman Jerome Powell, who has a law degree, is fond of referring to the Fed’s “models” when he talks about the economy, and he seems to think they are always accurate as he persists in saying inflation is transitory.
Perhaps he needs to pay more attention to real life, where prices are galloping ahead and normal people don’t have the luxury of waiting it out.