Federal Reserve officials suggested that they might need to pull back their extraordinary support for the economy sooner than they had anticipated because of stronger-than-expected growth this year.
Fed officials discussing the matter at their June 15-16 Fed meeting weren’t ready to pull back yet on their $120 billion in monthly purchases of Treasury and mortgage securities, according to minutes of the gathering released Wednesday.
But they generally agreed that, “as a matter of prudent planning, it was important to be well positioned to reduce the pace of asset purchases, if appropriate, in response to unexpected economic developments, including faster-than-anticipated progress” toward the Fed’s inflation and employment goals or risks of undesirable levels of inflation or asset bubbles.
The minutes showed officials still expect recent surges in inflation to be temporary, driven primarily by bottlenecks and shortages caused by the pandemic. But some officials raised concern that inflation expectations “might rise to inappropriate levels if elevated inflation readings persisted,” the minutes said.
The minutes indicated officials will ramp up deliberations at their next meeting, July 27-28, over when and how to reduce the asset purchases.
At last month’s meeting, 13 of 18 officials projected they would raise interest rates from near zero by 2023, with most expecting to raise their benchmark rate by 0.5 percentage point. Seven expected to raise rates next year. In March, most officials expected to hold rates steady through 2023.
The projections revealed growing divisions over the likely path for policy two years from now and jarred some investors who hadn’t expected more officials to project a need for more rate rises over the next 2½ years.
Fed officials expected a temporary burst in inflation as the economy struggles to supply enough goods and services to keep up with demand this year. But the spurt has been stronger and broader based than officials expected. On a 12-month basis, the Fed’s preferred inflation gauge, after excluding volatile food and energy categories, rose 3.1% in April and 3.4% in May, a 29-year high.
Investors and Fed officials are grappling not only with an unexpected blast of price pressures but also with implementing a new policy framework, unveiled in August 2020, designed to seek periods of inflation moderately above 2% after periods below that level. Officials have been vague around defining the precise parameters for what would be an acceptable period or magnitude of above-target inflation.
Last year, the Fed laid out three tests that would need to be met before raising rates from their current setting near zero. First, inflation would need to reach 2%. Second, inflation would need to be expected to run moderately above 2%. Third, the economy would need to return to maximum employment, which officials haven’t precisely defined.
hasn’t said whether the central bank has met its inflation goal, but his recent remarks have suggested the Fed’s leadership believes its goal of average 2% inflation has or will soon be satisfied. That would make officials’ assessments of when the economy has returned to maximum employment as the final threshold to determine when to raise rates.
Fed officials have been less precise around when they will curtail their purchases of $80 billion a month in Treasurys and $40 billion a month in mortgage-backed securities. They have said they would need to see “substantial further progress” since December 2020 before reducing, or tapering, those purchases.
The goal of that guidance is to avoid the kind of market backlash that occurred in 2013, when then-Chair
suggested the central bank might soon taper its asset purchases. Investors thought the Fed was accelerating its plans to raise interest rates, sparking a sudden one-percentage-point jump in the 10-year Treasury yield that became known as the “taper tantrum.”
Last month’s economic and interest-rate projections show officials think they will reach their overall goals “somewhat sooner than anticipated,” Mr. Powell said in a June 16 press conference. The standard for tapering the bond buying remains “a ways away,” he said.
Since the officials’ previous meeting, in April, the labor market’s progress had been somewhat slower than anticipated. Employers added 852,000 jobs in April and May combined, leaving total employment 7.6 million jobs shy of pre-pandemic levels. Last week, the Labor Department said employers added another 850,000 jobs in June.
Policy makers have sounded less confident in recent weeks that the economy can recover all the jobs lost amid the pandemic without spurring inflation. Some 2.6 million people retired between February 2020 and April of this year, according to estimates from the Dallas Fed. A steadily aging population could imply limited scope for reversing that trend.
Write to Nick Timiraos at [email protected]
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