Fed Officials Prepare for November Reduction in Bond Buying

Phasing out the Fed’s pandemic-era stimulus by the middle of 2022 could clear the path for an interest-rate increase

Sept. 10, 2021

Federal Reserve officials will seek to forge agreement at their coming meeting to begin scaling back their easy money policies in November.

Many of them have said in recent interviews and public statements that they could begin reducing, or tapering, their $120 billion in monthly purchases of Treasurys and mortgage-backed securities this year. While they are unlikely to do so at their meeting on Sept. 21-22, Fed Chairman Jerome Powell could use that gathering to signal they are likely to start the process at their following session, on Nov. 2-3.

Under the plans taking shape, officials could reduce those purchases at a pace that allows them to conclude asset buying by the middle of next year.

Mr. Powell said in a recent speech that at their July meeting, he believed that “if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year.” New York Fed President John Williams, a top ally of Mr. Powell’s, made a nearly identical statement during a virtual appearance on Wednesday.

The central bank last December said it would continue the current pace of bond buying until officials concluded they had achieved “substantial further progress” toward their goals of 2% average inflation and robust employment.

“I think it’s clear that we have made substantial further progress on achieving our inflation goal,” Mr. Williams said. “There has also been very good progress toward maximum employment.”

The Delta variant of the coronavirus has resulted in a surge in new infections, but many Fed officials have said it isn’t posing the same headwind to consumer spending as did earlier virus waves last year.

Mr. Williams told reporters Wednesday that while the pandemic was likely a factor in a hiring slowdown last month, he said the overall path of employment gains this year has been sturdy. He said he is more focused on overall hiring this year than on monthly fluctuations, a sign that the August job figures wouldn’t alter plans to taper in November. “Some months come in stronger, some not so strong—it’s really about the accumulation,” he said.

The Fed cut its short-term benchmark interest rate to near zero in March 2020 and has been buying $80 billion in Treasurys and $40 billion in mortgage-backed securities every month since June 2020 to provide additional stimulus to the economy.

Fed officials have indicated they don’t want to be in a position where they are still increasing their $8.4 trillion asset portfolio when an interest-rate increase might be needed to keep inflation in check.

Officials still have to iron out the exact pace of any taper. Some have advocated reducing their purchases of Treasurys and mortgage bonds in regular, proportional intervals so that the Fed could conclude asset buying by the middle of 2022. That would be somewhat sooner than anticipated by New York banks that responded to a Fed survey in mid-July.

One possible path under consideration would see the central bank reduce its purchases of Treasury bonds by $10 billion a month and mortgage securities by $5 billion a month.

The Fed wound down its previous bond-buying program very gradually, reducing its purchases over the course of 10 months. But when it announced the plan in December 2013, the economy was weaker than now, with higher unemployment and low inflation.

Today’s economy is growing rapidly and faces challenges from supply-chain disruptions as opposed to anemic demand. Unemployment is much lower, at 5.2% in August. Inflation is much hotter. And bond yields, which spiked in 2013 when Fed officials began talking publicly about reducing bond purchases, have tumbled this year.

“It’s a different set of circumstances this time, both on inflation, on growth, on unemployment and employment,” said Mr. Williams. “There’s no necessity to follow a specific time frame or approach from before. It’s really about setting policy as appropriate for the conditions that we’re in today.”

Disrupted supply chains, temporary shortages and a rebound in travel have pushed inflation to its highest readings in decades. Core inflation, which excludes volatile food and energy prices, rose 3.6% in July from a year earlier, according to the Fed’s preferred gauge.

A different gauge of overall prices, the consumer-price index, rose 5.3% in July. The Labor Department is set to release August inflation figures for that index next week.

Fed Vice Chairman Richard Clarida said last month he thought the risks of higher-than-projected inflation were more prominent than the risks of lower-than-anticipated inflation. He also said he thought the unemployment rate could fall to 3.8% next year with inflation running above 2.1%, which would satisfy by the end of next year the thresholds the Fed has laid out to raise interest rates.

Mr. Powell has gone out of his way in public remarks to sever any perceived link between the Fed’s tapering plans and its thinking about when to begin raising interest rates.

But that could be difficult because several Fed officials have pushed to conclude the asset purchases by the middle of next year to clear the decks for a potential rate increase. It could be even trickier if new projections at the coming meeting show most officials expect they will need to raise rates next year.

At their June 15-16 policy meeting, most of the 18 officials who participated thought they would need to raise interest rates by a half percentage point through 2023; seven thought they would need to raise rates next year.

If just two more officials pencil in a rate increase in 2022, that would account for half of all meeting participants. It would underscore their growing expectation that a burst of fiscal stimulus this year, coupled with bottlenecks associated with reopening the economy, had either put the Fed on track to meet its inflation and employment objectives or that it had created a risk that inflation would continue running too high.