Fed officials signal move toward tapering bond purchases

Federal Reserve officials are moving toward reducing the pace of the central bank’s monthly purchases of Treasury and mortgage bonds by the end of the year, according to minutes released Wednesday from a July meeting.

A growing portion of the Federal Open Market Committee (FOMC), which sets Fed monetary policy, expressed support for paring down bond buying after several months of high inflation and accelerating job gains, the minutes showed.

“Most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year,” the minutes read. “Various participants commented that economic and financial conditions would likely warrant a reduction in coming months.”

The Fed began buying up to $120 billion in Treasury bonds and mortgage-backed securities in March 2020 amid the onset of the COVID-19 pandemic. The asset purchases, coupled with a steep Fed rate cut, were meant to keep credit flowing through the economy as the financial sector worked through the shock of the coronavirus.

Fifteen months later, an increasing number of Fed officials, lawmakers and investors are urging the bank to begin tapering its asset purchases. 

Those who support paring back bond purchases argue that the job market has recovered beyond the need for additional stimulus that could further fuel inflation, which reached an annualized rate of 5.4 percent in July.

But some Fed officials argued at last month’s meeting that it’s too soon to pull back, pointing to the temporary forces pushing inflation higher and a lack of sufficient progress toward replacing jobs lost during the pandemic.

“Several others indicated … that a reduction in the pace of asset purchases was more likely to become appropriate early next year because they saw prevailing conditions in the labor market as not being close to meeting the Committee’s ‘substantial further progress’ standard or because of uncertainty about the degree of progress toward the price-stability goal,” the minutes read.

The FOMC has insisted for months that it will not raise interest rates or pare back bond purchases until it sees “substantial further progress” toward an annual inflation rate of 2 percent and full employment. Fed officials emphasized last month, however, that the tapering process wasn’t linked to an eventual interest rate hike.

The Fed, led by Chairman Jerome Powell, is not expected to hike interest rates until the end of 2022 at the earliest, and many FOMC officials expressed support for ending bond purchases before the Fed increases its baseline interest rate range.

The pace of the recovery will be a major test of President Biden’s economic agenda, and may play a key role in determining whether Biden nominates Powell for another four-year term as Fed chairman. His term is slated to expire in February.

FOMC members also discussed in July’s meeting how the emergence of the delta variant of COVID-19 could complicate their efforts to guide the economy out of crisis-level stimulus without further disruptions.

Many participants remarked that uncertainty was quite high, with slowing in progress on vaccinations and developments surrounding the delta variant posing downside risks to the economic outlook. A number of participants judged that the effects of supply chain disruptions and labor shortages would likely complicate the task of interpreting the incoming data and assessing “the speed at which these supply-side factors would dissipate,” the minutes read.