Fed nearing bond buying taper, still divided on inflation

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Despite a widely shared view that the US labor market has recovered enough to allow the Federal Reserve to begin reducing its monthly bond purchases next month, policymakers are very divided on inflation and what they should do about it.

Opinions expressed in the past 24 hours ranged from concerned to optimistic. Some lawmakers are convinced that once supply chains disrupted by the pandemic are back on track, price increases will subside on their own. Others see a broadening of inflationary pressures as evidence that they won’t unless the Fed does more to combat it.

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The divisions point to difficult debates over Fed policy ahead, just as the leadership of the US central bank is heading for an epoch-changing makeover.

Fed Chairman Jerome Powell’s four-year term ends in February, and US President Joe Biden must decide soon whether to rename him or elect another leader. In addition, you will need to fill up to three of the other six seats on the Fed’s Board, whether they are vacant or soon.

And two of the Fed’s 12 regional bank presidents recently stepped down after an ethics scandal https://www.reuters.com/article/usa-fed-ethics/exclusive-fed-bank-chiefs-in -letter-to -sen-warren-undertake-to-comply-with-the-ethical-review-idUSKBN2H42E4 of their personal investment strategies.

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Both were among the Fed’s biggest advocates of an anticipated reduction in Fed stimulus.

All of that, as the US government reported that producer prices rose 8.6% in the 12 months through September https://www.reuters.com/business/us-weekly-jobless-claims- fall-sharply-last-week-producer-prices -increase-2021-10-14, the biggest year-on-year advance in nearly 11 years, and US consumer prices soared 5.4% over the same period . The reports also showed a month-over-month profit deceleration, suggesting that COVID-driven price increases may already have peaked.

‘UPON’

At a virtual meeting of the Euro50 Group on Thursday, St. Louis Fed Chairman James Bullard described the inflation trend as “worrisome.”

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“While I think there is some chance that this will dissipate naturally in the next six months, I wouldn’t say it’s such a strong case that we can count on that to happen,” Bullard said, adding that it gives about a 50% chance. .

Bullard has been pushing for the Fed to begin cutting its $ 120 billion in monthly purchases of Treasury bonds and mortgage-backed securities next month, and minutes of the US central bank’s policy meeting from 21 to September 22 https://www.reuters.com / business / patient-or-aggressive-fed-policymakers-split-inflation-response-2021-10-13 show that policymakers generally favor do so, with plans to conclude the process by mid-2022.

Bullard, however, wants to end bond purchases for the first quarter of 2022 to allow the Fed to raise interest rates as early as spring if inflation remains uncomfortably high.

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The Fed has promised to keep its benchmark interest rate for overnight loans at the current level close to zero until the economy reaches full employment, and inflation has not only reached its 2% target, but is on track. to stay modestly above that level for some time.

The central bank set those parameters when inflation had been below 2% for years, and the challenge was seen as raising it rather than lowering it.

But now, the opposite problem may be looming, as stifled consumer demand drives spending in a reopening economy and businesses, hampered by supply bottlenecks, struggle to keep up.

In a speech late Wednesday at South Dakota State University, Fed Governor Michelle Bowman sounded the alarm about inflation and her concerns that loose monetary policy is helping fuel high prices and possible asset bubbles. Bowman also urged the “phasing out” of bond buying to begin next month.

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But others have a different view of the situation.

San Francisco Fed Chair Mary Daly, one of the central bank’s more dovish policymakers, told CNN International on Thursday that inflation is not tied to monetary policy at this juncture and that a restrictive policy do much to reduce it.

Daly said the price hike “is going to last as long as COVID is with us” because it is driven by supply chain bottlenecks caused by pandemic-related disruptions, and that inflation would decline once the pandemic did.

“It’s premature to start talking about rate increases,” Daly said.

However, several of his colleagues continue to do so.

Philadelphia Fed Chairman Patrick Harker told the Prosperity Caucus in Washington, DC that he does not expect any increase in interest rates “until late next year or early 2023, unless the inflation outlook changes dramatically. “.

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Speaking to the Forecasters Club of New York, Richmond Fed Chairman Thomas Barkin made it clear that he is still not convinced which direction inflation will take.

And he said he’s not sure whether labor supply constraints, which are driving up wages and could lead to higher prices, will ease as more people return to the workforce, or if many of the 5 million who have been gone have done it permanently.

“I am not one of the people who feels the need to make the statement” on whether inflation is transitory or not, he said. But by reducing asset purchases, he said, the Fed buys time to figure it out. (Reporting by Ann Saphir and Jonnelle Marte Edited by Paul Simao and Diane Craft)