Powell Weighs Earlier End to Bond Tapering Amid Hot Inflation
Federal Reserve Chair Jerome Powell said the strong U.S. economy and elevated inflation could warrant ending the central bank’s asset purchases sooner than planned next year, though the new omicron strain of Covid-19 poses a fresh risk to the outlook.
“It is appropriate, I think, for us to discuss at out next meeting, which is in a couple of weeks, whether it will be appropriate to wrap up our purchases a few months earlier,” Powell said Tuesday. “In those two weeks we are going to get more data and learn more about the new variant.”
Powell made the comment in response to questions during a Senate Banking Committee hearing in Washington. The Fed is currently scheduled to complete its asset-purchase program in mid-2022 under a plan announced at the start of November; policy makers next meet Dec. 14-15, where they could make a decision to accelerate the tapering.
The remark triggered a sharp response in financial markets. Stocks fell and the U.S. Treasury yield curve flattened as investors bet that a sooner end to the taper could lead to interest rates being raised earlier next year than previously anticipated. Fed officials have consistently said they want to wrap up the taper before increasing borrowing costs from near zero, where they’ve been since the onset of the pandemic in March 2020.
Shortly before the comment on asset purchases, Powell said it’s time to stop using the word “transitory” to describe inflation in a remark that also caught the ear of investors as a clue to a hawkish turn at the next meeting.
“We tend to use it to mean that it won’t leave a permanent mark in the form of higher inflation,” Powell said. “I think it’s a good time to retire that word and try to explain more clearly what we mean.”
Powell, in his opening remarks, said that the recent rise in Covid-19 cases and the emergence of the omicron variant pose “downside risks to employment and economic activity and increased uncertainty for inflation.” But during the following question-and-answer period, the questions -- and his answers -- focused more on the accumulating evidence of elevated prices since officials met Nov. 2-3.
Price Pressures Run Hot
U.S. October headline inflation increased by the most since 1990 on annual basis
Source: Bureau of Labor Statistics, Bloomberg survey
In the week after that gathering, the Labor Department reported stronger-than-anticipated job gains for October, followed by data showing the biggest increase in the consumer price index in three decades.
“Since the last meeting we’ve seen basically elevated inflation pressures, we’ve seen very strong labor-market data without any improvement in labor supply, and we’ve seen strong spending too,” Powell said. “And remembering that every dollar of asset purchases does increase accommodation. We now look at an economy that is very strong and inflationary pressures that are high.”
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