Inflation will remain higher so there’s more potential for risk assets: Global market strategist
Most Federal Reserve officials agreed last month they could start slowing the pace of bond purchases later this year, judging that enough progress had been made toward their inflation goal, while gains had 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 July 27-28 gathering, released Wednesday, said. “Several others indicated, however, that a reduction in the pace of asset purchases was more likely to become appropriate early next year.”
The minutes also showed that most participants “judged that it could be appropriate to start reducing the pace of asset purchases this year.”
U.S. central bankers next meet September 21-22. While the record shows that they don’t yet have agreement on the timing or pace of tapering asset purchases, most had reached consensus 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 showed split views on the durability of faster inflation as well as on key areas of policy making.
While the recent surge in consumer prices has grabbed policy makers’ attention and prompted wide agreement on pulling back on asset purchases, “several” meeting participants were still worried that inflation could slump back into the pre-pandemic trend of running below the 2 per cent target.
On the labor front, officials saw progress -- yet the late-July discussion also showed uncertainty over both near- and medium-term labor market slack, given the job destruction tied to the pandemic.
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.
“Several participants emphasized that employment remained well below its pre-pandemic 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.”
Treasuries advanced after the release, though remained down for the session, with 10-year yields at 1.28 per cent as of 3:47 p.m. in New York, compared with about 1.29 per cent before the release. The S&P 500 Index of equities slumped 0.8 per cent.
Fed policy makers 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 a see a “few more” strong jobs reports and others, such as Boston Fed President Eric Rosengren, saying he’s open to announcing plans for a reduction at the next meeting if employment figures come in well.
“Many participants saw potential benefits” in ending the Fed’s bond buying before targets were hit for raising interest rates, the minutes showed. Policy makers also discussed the importance of disassociating moves on asset purchases from a decision on an eventual rate hike.
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-buying 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 per cent last month, but broader measures still show slack.
The employment-to-population ratio for workers between 25 and 54 years old was 77.8 per cent last month compared to 80.5 per cent at the start of 2020, while Hispanic and Black unemployment rates remain high at 6.6 per cent and 8.2 per cent.
The recovery has been strong with both supply and demand imbalances pushing prices higher. The Fed’s inflation indicator rose at a 4 per cent pace for the 12 months ending June compared with the Fed’s 2 per cent target.
The minutes showed that “most participants” remarked that their standard for progress had been achieved with respect to the price stability goal.
Fed officials cut their benchmark lending rate to zero in March 2020 and announced they would buy US$200 billion of agency mortgage-backed securities and US$500 billion of Treasuries to support market functioning. By December 2020, they realigned their guidance saying they would purchase US$80 billion a month in Treasuries and US$40 billion a month on mortgage securities “until substantial further progress has been made toward its maximum employment and price stability goals.”
The asset purchases have lowered longer-term interest rates and helped fuel a rise in housing prices and other financial assets, with one-month gains in home price indices breaking records while stock indexes trade around record highs.