Taper Likely to Start This Year

Most Federal Reserve officials agreed last month that they can start slowing the pace of bond purchases before the end of 2021, judging that enough progress has been made toward their inflation goal, while gains have also been made toward their employment objective.

“Various participants commented that economic and financial conditions would likely warrant a reduction in coming months,” minutes of the Federal Open Market Committee’s (FOMC’s) July gathering, which were released Wednesday, said. “Several others indicated, however, that a reduction in the pace of asset purchases is more likely to become appropriate early next year.”

The minutes also show that most participants “judged that it could be appropriate to start reducing the pace of asset purchases this year.”

The U.S. central bankers next meet on September 21. While the record shows that they don’t yet have consensus on the timing or pace of tapering asset purchases, most agree on keeping the composition of any reduction in Treasury and mortgage-backed securities purchases proportional.

“The FOMC minutes again reveal a wide spread of opinion on the question of the timing, speed, and structure of the upcoming tapering,” Ian Shepherdson, chief economist at Pantheon Macroeconomics Ltd., said after the release.

The minutes show split views on the durability of the current higher rate of inflation, as well as on key areas of policymaking. Although the recent surge in consumer prices has grabbed policymakers’ attention and prompted wide agreement on pulling back on asset purchases, “several” meeting participants are still worried that inflation could slump back into the prepandemic trend of running below the 2 percent target.

On the labor front, officials see progress, yet the late-July discussion also shows uncertainty over both near- and medium-term labor market slack, given the job destruction tied to the pandemic.

“Several participants emphasized that employment remained well below its prepandemic level and that a robust labor market, supported by a continuation of accommodative monetary policy, would allow further progress toward” labor-market goals, the minutes said. “Several participants also commented that price increases concentrated in a small number of categories were unlikely to change underlying inflation dynamics sufficiently to overcome the possibility of a persistent downward bias in inflation.”

Policy choices going forward are also likely to be influenced by new appointees to the Fed Board, as the Biden administration moves to fill as many as four positions by early 2022.

Market Response

Treasuries advanced after the release, though remained down for the session, with 10-year yields at 1.28 percent as of 3:47 p.m. in New York, compared with about 1.29 percent before the release. The S&P 500 Index of equities slumped 0.8 percent.

Fed policymakers have differed publicly in the weeks since the meeting over when the central bank should start tapering, with some, like Minneapolis Fed President Neel Kashkari, wanting to see “a few more” strong jobs reports and others, such as Boston Fed President Eric Rosengren, saying they’re open to announcing plans for a reduction at the next meeting if employment figures are good.

Policymakers also discussed the importance of disassociating moves on asset purchases from a decision on an eventual rate hike. “Many participants saw potential benefits” in ending the Fed’s bond buying, regardless of whether targets for raising interest rates have been hit, the minutes show.

St. Louis Fed President James Bullard said Wednesday that he would like to see the tapering of the asset-purchase program done by the first quarter of 2022—a much faster pace than prior wind-downs.

On the composition of bond purchases, “most participants remarked that they saw benefits in reducing the pace of net purchases of Treasury securities and agency MBS proportionally.”

The minutes indicate that officials still see room for labor-market improvement. Job gains have been strong, averaging 617,000 a month through July. The unemployment rate stood at 5.4 percent last month, but broader measures still show slack. The employment-to-population ratio for workers between 25 and 54 years old was 77.8 percent last month, compared with 80.5 percent at the start of 2020, while Hispanic and Black unemployment rates remain high, at 6.6 percent and 8.2 percent.

The recovery has been strong, with both supply and demand imbalances pushing prices higher. The Fed’s inflation indicator rose at a 4 percent pace for the 12 months ending in June, compared with the Fed’s 2 percent target. The minutes show “most participants” remarked that their standard for progress has been achieved with respect to the price stability goal.

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