A senior Federal Reserve official has called for a debate about tapering the central bank’s asset purchases if the US recovery keeps gathering steam, the latest sign the Fed is edging towards reducing its support for the economy.
Randal Quarles, a Fed vice-chair, on Wednesday said he believed that even after “discounting temporary factors”, the increase in US inflation since December would “prove sufficient” to merit a drawdown in asset purchases later in 2021.
However, the labour market is still lagging, he said in remarks to the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, a think-tank.
“If my expectations about economic growth, employment, and inflation over the coming months are borne out . . . and especially if they come in stronger than I expect . . . it will become important for the [Federal Open Market Committee] to begin discussing our plans to adjust the pace of asset purchases at upcoming meetings,” Quarles said.
“In particular, we may need additional public communications about the conditions that constitute substantial further progress since December toward our broad and inclusive definition of maximum employment,” he added.
Quarles is not the only top official at the Fed to hint at the central bank’s readiness to begin considering a reduction of its monetary policy support should the economy continue to recover. This represents a shift from the central bank’s stance that any discussion of tapering asset purchases was premature.
“There will come a time in upcoming meetings, we’ll be at the point where we can begin to discuss scaling back the pace of asset purchases,” Richard Clarida, also a Fed vice-chair, said in an interview with Yahoo Finance. “It’s going to depend on the flow of data that we get.”
San Francisco Fed president Mary Daly has also confirmed the central bank is beginning to broach the topic of tapering. “We’re talking about talking about tapering, and that is what you want out of us,” she said in an interview with CNBC on Tuesday. “You want to be long-viewed here.”
Quarles said the discussion about curtailing the massive monetary stimulus put in place by the Fed during the pandemic was a matter of “risk management”.
“The best analysis we currently have is that the rise in inflation to well above our target will be temporary. But those of us on the FOMC are economists and lawyers, not prophets, seers and revelators. We could be wrong, and what happens then?” he said.
“Part of the calculus in balancing the risks of either overshooting or undershooting our 2 per cent goal is that the Fed has the tools to address inflation that runs too high, while it is more difficult to raise inflation that falls below target.”
In a subsequent question and answer session, Quarles added: “If we had changed our monetary policy framework at 6 per cent inflation, that would be a different sort of thing. We have some elbow room to be wrong here.”
The Fed’s favourite inflation gauge, core PCE, currently sits at 1.8 per cent, and as part of its new approach unveiled last August, it has committed to keeping policy ultra accommodative until it achieves a more inclusive recovery.
Even as he stressed the importance of a Fed discussion on limiting asset purchases, Quarles said the central bank needed to be “patient” in the face of temporary rises in prices and wages, as long as inflation expectations were “consistent” with its goals. Any talk of an interest rate increase at the Fed was “far in the future”, he added.