Federal Reserve officials debated at their last meeting whether to accelerate the pace of cuts to their emergency bond purchases. Based on today’s minutes of the Federal Open Market Committee’s Nov. 2-3 meeting, the conversation reflected growing unease over inflation, which is both larger and more persistent than officials. hadn’t foreseen it.
The Fed has started buying $ 120 billion a month in treasury and mortgage-backed securities in response to the pandemic, and has signaled in recent months that it plans to start cutting back on purchases; the reduction process began this month. The final minutes of the Fed’s political arm have highlighted a crucial debate for the direction of monetary policy as President Joe Biden mulls nominations for several vacant central bank seats.
The minutes reiterate the view of officials that the price increase is linked to the reopening of bottlenecks and, therefore, is temporary. However, the minutes also suggest that officials have become less confident in their assessment that inflation is transient.
“Participants generally viewed the current high level of inflation as largely reflecting factors that may be transitory, but felt that inflationary pressures may take longer to subside than previously estimated.” , indicates the minutes.
In other words, “transient” may represent a longer delay than expected.
The Delta wave of Covid-19 intensified barriers to supply chains and helped keep demand for goods high, adding to the upward pressure on prices. The minutes read: “Participants also observed that increases in energy prices, higher nominal wage growth rates and higher housing rental costs had contributed to inflation,” some participants said. highlighting the fact that price increases had become widespread.
Thus, some participants suggested that it might be justified to reduce the pace of asset purchases by more than $ 15 billion per month. Key takeaway: Speeding up the downsizing process would put the FOMC “in a better position to adjust the target range of the federal funds rate, especially in light of inflationary pressures,” the minutes said.
Fed Chairman Jerome Powell has worked hard to convince markets that tapering does not start the clock for interest rate hikes, but the minutes suggest some members want to raise rates sooner than expected .
Even so, the minutes show that if participants expect “significant inflationary pressures to last longer than they previously expected”, they generally continue to expect the rate of inflation to decline significantly. in 2022 as the imbalances between supply and demand are reduced.
The FOMC will then meet on December 14 and 15, following the release of the November jobs report and the consumer price index. The appearance of the labor market, especially if low participation continues to push up wages, and the continued rise in consumer prices will shape these discussions. At this point, investors expect interest rates to take off in June 2022, but an accelerated degression schedule could push forward the first rate hike.
While the bar for accelerating the reduction in asset purchases is high, “it seems reasonably likely that it will be crossed if we see another solid payroll report and inflation data in December,” said Bob Miller, head of fundamental fixed income for the Americas at BlackRock. .
Write to Lisa Beilfuss at [email protected]