The US Federal Reserve should begin tapering its bond-buying program next month, although interest rate increases are probably “still some time off,” Fed Governor Christopher Waller said on Tuesday.
“While there is still room to improve on the employment leg of our mandate, I believe we have made enough progress such that tapering of our asset purchases should commence following our next FOMC meeting, which is in two weeks,” Waller said in remarks prepared for a virtual speech, referring to the Nov. 2 and 3 meeting of the policy-setting Federal Open Market Committee.
“I believe the pace of continued improvement in the labor market will be gradual and I expect inflation will moderate, which means liftoff is still some time off,” he said, with the caveat that “if my upside risk for inflation comes to pass, with inflation considerably above 2 percent well into 2022, then I will favor liftoff sooner than I now anticipate.”
Photo: Reuters
Fed officials are getting ready to begin winding down the bond-buying program they put in place last year in the early days of the COVID-19 pandemic, which currently has the US central bank purchasing US$120 billion a month of US Treasuries and mortgage-backed securities.
They broadly agreed to start the process in either the middle of next month or in mid-December, minutes of their last meeting on Sept. 21 and 22 showed.
Projections published at the conclusion of that gathering showed that the committee was evenly split on whether increases in its benchmark interest rate, which is currently near zero, would be necessary next year.
Since then, amid unfavorable news about the outlook for inflation, investors in money markets have pulled forward their expectation for the timing of a rate increase to the middle of next year.
“If inflation were to continue at 5 percent into 2022,” the quarterly forecasts provided by Fed officials of projected future interest rates would show “people pulling their ‘dots’ forward and having potentially more than one hike in 2022,” Waller said.
It would be important to monitor measures of inflation expectations in household surveys and financial markets to determine the path forward for policymakers, he said.
He pointed to an index maintained by Fed economists “which distills a signal from both surveys and market-based inflation gauges.”
“At this point, at least, it remains near its average over the past decade,” Waller said. “This gives me some comfort that the recent run of high inflation readings has not led to an unanchoring of inflation expectations.”
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