Federal Reserve Chairman Jerome Powell adjusts his tie when he arrives to speak on Capitol Hill, Washington, before a Senate Committee on Banking, Housing and Urban Affairs hearing on the “Semi-Annual Monetary Policy Report to Congress” Testimony July 15, 2021.
Kevin Lamarque | Reuters
Changed monetary policy attitudes amid unexpected economic data opened the door for the Federal Reserve to announce its decision in September to cut its asset purchases and begin cutting purchases about a month later.
Interviews with officials along with their public comments show growing support for a faster timeline for the rejuvenation than the markets expected a month ago. These changing views follow strong employment data over the past two months, along with higher inflation readings.
Fed Governor Christopher Waller and Fed bank presidents Eric Rosengren, Robert Kaplan and Jim Bullard publicly called for a throttle in September. Atlanta-based Raphael Bostic endorsed the start of the taper sometime between October and December, hinting that he might as well endorse an announcement in September. The group is not known to be hawks, and in fact, some were among those who first made calls for historic Fed action to support the economy at the start of the pandemic.
The Fed could postpone the decision until the November meeting if August job data is weak, the Delta variant triggers another round of economic lockdowns, or inflation data subsides. But stronger-than-expected inflation data last week and projections that it could stay high into next year have bolstered support for the earlier taper announcement.
Markets have also shifted expectations, leaving the Fed room to act earlier. CNBC-Fed survey respondents in July named November as the announcement month and January as the start of the taper. But a Reuters poll last week found that September is the new consensus.
Powell on board?
Fed chairman Jerome Powell has generally been more reluctant than some members of his committee, although he has not spoken since the latest data was released. Powell has provided some evidence that he could be persuaded to leave early. While insisting that most of the inflation would be temporary, he also said, “We have to take the risk case seriously, which is that inflation will be more persistent.”
Last week’s inflation data showed some moderation in consumer prices, but growing inflationary pressures at the wholesale level. Some Fed officials are now predicting that higher inflation could continue into next year.
Powell said at his July news conference that the Fed was still “a long way off” from making the significant further advances required to make a cut, but that was upward revisions before the July jobs report of more than 900,000 new jobs for May and June and forecasts for continued strong staff growth. He also said the decision on the reduction would be left to the committee. Additionally, Powell suggested that the Delta variant doesn’t pose a huge risk to the economy.
Until recently, Powell’s primary focus was avoiding a taper tantrum, a replay of the sharp bond market sell-off in 2013 sparked by Fed Chairman Ben Bernanke, who spoke of a possible reduction in asset purchases. But Powell seems to have achieved that goal. Fed officials have been open about tapering for several months, and stocks have risen and bond yields, although volatile, have generally remained low.
Expectations for rate hikes beginning either in late 2022 or early 2023 have remained almost unchanged despite all the taper talks. That suggests, for Fed officials, that they have achieved their goal of parting with a decision to raise interest rates in the minds of the market.
A September taper could also meet Powell’s criteria of notifying markets in advance. The Fed has admitted that it discussed the taper at its June and July meetings. An announcement in September with the start of the expansion in October or November would mean a notice period of four or five months
A decision in September could face opposition from several more reluctant members of the committee. Chicago Fed President Charles Evans said last week he wanted to see “a few more months” of employment data before making a decision. Fed Governor Lael Brainard said she would like to see school opening dates and September economic data.
Such differences are typical of the Fed at turning points in policy, and it is up to the chairman to forge consensus or move forward with dissent. It appears that Powell could face dissent with both decisions in September. Powell could find support with pigeons with a slower taper, for example one that takes 10 months instead of eight. Or he could appease hawks with a faster taper and a late announcement.
And markets can have more to say. Since the Fed has announced that it will cut them before rate hikes, a rate hike decision will immediately open the floodgates to discuss the first rate hike, potentially fueling rate hike expectations and tightening financial conditions faster than the Fed prefers.