Fed Chair Jerome H. Powell has repeatedly said that there will be plenty of warning before the Fed starts to unwind its asset purchases. Minutes released Wednesday from the Fed’s July policy meeting offered some insight into policymakers’ thinking.
Overall, most Fed officials said they felt that, as long as the economy kept growing as expected, “it could be appropriate to start reducing the pace of asset purchases this year,” according to the meeting minutes.
Some Fed officials believed it would be “prudent” for the Fed to get ready to scale back the purchases “relatively soon,” especially if high inflation proves “to be more persistent than they had anticipated.”
Still, others emphasized that there was “considerable uncertainty” around the labor market, supply chain issues, and the long-term influence the pandemic will have on the economy.
“Those participants stressed that the Committee should be patient in assessing progress toward its goals and in announcing changes to its plans on asset purchases,” the minutes stated.
The meeting minutes don’t name any Fed officials. But since the Fed’s July meeting, a growing number of policymakers have given their own opinions about when the central bank should start dialing back the asset purchases. Some have said the drawdown could begin this fall, thanks in part to encouraging job gains from June and July.
“We’ve had two months in a row where we’ve created more than 900,000 jobs and the unemployment rate dropped by half a percent to 5.4 percent,” Boston Federal Reserve Bank President Eric Rosengren told CNBC on Monday. “If we get another strong labor market report, I think that I would be supportive of announcing in September that we are ready to start the taper program.”
As a group, the Fed’s policy board will pick up their discussions at their next meeting in September. But in the meantime, much depends on the coronavirus public health crisis — and any repercussions for the economic recovery.
The spread of the delta variant has started a new phase of the pandemic and prompted some parts of the country to reimpose mask mandates and other restrictions. Consumer confidence plunged in the first half of August as the delta variant spread, according to a survey released last week by the University of Michigan. It’s too soon to tell whether hiring or consumer spending will suffer as a result.
Meanwhile, prices are on the rise, and they’re expected to keep climbing until supply chains can catch up with consumer demand. While Fed leaders have been waiting to see progress in the job market, some at the Fed argue that bar has already been met when it comes to inflation. (The Fed is responsible for both stable prices and maximum employment.)
Some Fed leaders have said that if the taper starts in the next few months, it could be wrapped up by next summer. That timeline suggests that Fed leaders could be ready to raise interest rates in late 2022 or 2023, since the taper would probably be complete before rates rise. (The Fed slashed rates to near zero at the beginning of the pandemic and are nowhere near considering a rate increase.)
There’s also open debate on how the Fed should structure and pace the taper. The monthly asset purchases are made up of $80 billion in Treasury securities and $40 billion in mortgage-backed securities. Surging home prices have some economists arguing that the Fed should reduce its purchases of mortgage-backed securities more quickly.
Others disagree, saying the mortgage securities aren’t meaningfully driving the hot housing market and that the two categories of asset purchases should be cut back at the same rate.
“I think that Treasury and [mortgage-backed security] purchases affect financial conditions in very similar ways,” Powell said last month. “There may be modest differences in terms of contribution to housing prices. But it’s not something that’s big.”