WASHINGTON — Federal Reserve officials started discussing at their meeting last month the timing and mechanics of reducing their huge monthly bond purchases, which are used to keep longer-term interest rates in check.
The debate, revealed in the minutes of the Fed’s June meeting released Wednesday, reflected a broadly positive outlook on the economy among Fed policymakers but also some concern that higher inflation could prove more persistent than the central bank has previously indicated. Still, economists saw little sign that the Fed was any closer to hiking interest rates or reducing its bond buys.
A few policymakers “mentioned that they expected the conditions for beginning to reduce” bond purchases would “be met somewhat earlier than they had anticipated ... in light of incoming data,” the minutes said.
The Fed is buying $120 billion a month in Treasury securities and mortgage-backed bonds to keep longer-term interest rates low and encourage more borrowing and spending. Those purchases have flooded financial markets with cash, potentially fueling asset bubbles, some economists have argued. The Fed has said that it will keep making the purchases until the economy makes “substantial further progress” toward its goals of full employment and an inflation rate slightly above 2%.
But there is a clear split on the Fed's policymaking committee, with “some officials” cautioning that recent economic reports provide “a less clear signal about the underlying economic momentum.” The June 15-16 meeting was held before the most recent jobs report, which showed the economy had gained 850,000 new positions last month.
“Several of these (officials) emphasized that the (Fed) should be patient” about making any changes to its bond purchase plans, the minutes said.
Paul Ashworth, chief U.S. economist for Capital Economics, a consulting firm, said the minutes “were not as hawkish as we suspected.” In Fed parlance, “hawks” typically worry more about inflation and are less concerned with keeping unemployment low, while “doves” take the opposite view.
“There seems to be only limited support for beginning to taper the monthly asset purchases anytime soon,” Ashworth said.
After the June meeting, the Fed issued a statement and a set of economic projections that signaled that it would potentially dial back its low-interest rate policies earlier than it had previously projected. The policymakers forecast that they would hike the Fed's benchmark short-term interest rate twice by the end of 2023. In March, they had indicated no rate hikes would occur before 2024.
The minutes showed Fed officials expressed optimism about the economy, even as they said it was still far from meeting their employment and inflation goals.
Policymakers “observed that economic activity was expanding at a historically rapid pace, led by robust gains in consumer spending,” the minutes said.
Most Fed officials expected inflation to decline in the coming months as some supply chain bottlenecks eased, the minutes said. Fed Chair Jerome Powell has repeatedly said that recent jumps in consumer prices would be temporary and largely reflected disruptions surrounding the reopening of the economy.
But “a substantial majority” of policymakers said that there was a risk inflation could stay higher than expected, “because of concerns that supply disruptions and labor shortages might linger for longer and might have larger or more persistent effects on prices and wages than they currently assumed.”
Most economists still expect a reduction, or tapering, of bond purchases to begin by late this year or early next year, with an announcement of the change potentially occurring in late August at the Fed's annual conference at Jackson Hole, Wyoming.
Some differences over the timing of the tapering have emerged among the Fed's regional bank presidents, with Dallas Fed President Robert Kaplan saying last week that he favored pulling back on the purchases “sooner rather than later.”
San Francisco Fed President Mary Daly, in an interview with The Associated Press, said last week that it would be “appropriate” to consider tapering later this year or early next year. But she cautioned that the economy is “far from full employment."