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Fed Officials Saw Bond-Buying Pace Continuing for ‘Some Time’

Matthew Boesler and Steve Matthews
·3 min read

(Bloomberg) -- Federal Reserve officials in January expected it would be “some time” before conditions to scale back their massive bond purchases were met, leaving open the question of whether any tapering could start before 2022.

“With the economy still far from those goals, participants judged that it was likely to take some time for substantial further progress to be achieved,” according to minutes of their Jan. 26-27 gathering, published Wednesday.

The account reinforced the dovish message from Fed Chair Jerome Powell, who said last week that the U.S. is “very far from a strong labor market whose benefits are broadly shared,” noting employment was still nearly 10 million jobs below levels that prevailed before the coronavirus pandemic began. It’s a theme he is likely to return to next week in semi-annual testimony before Congress.

“Some time” in that context probably means a number of quarters, “given the uncertainty that they still see and how far conditions still are from being acceptable,” said Roberto Perli, a former Fed economist who is now a partner at Cornerstone Macro in Washington.

A brightening outlook for the U.S. economy since the start of the year has added to investor speculation over when the Fed will begin scaling back the bond-buying program, which is currently running at a pace of $120 billion of Treasury and mortgage-backed securities purchases per month.

While some regional Fed presidents have raised the possibility of paring bond purchases later in 2021 if the economy performed better than expected, Powell has called such talk premature, citing lessons from the 2013 taper tantrum, when news the central bank was thinking about reducing bond buying roiled markets and hit the economy.

The central bank’s official guidance states it will continue purchases at that pace until the economy has made “substantial further progress” toward full employment and its 2% inflation target. But U.S. Treasury yields have been on the rise amid increased optimism that President Joe Biden and congressional Democrats will authorize more fiscal relief measures, speeding the economy’s recovery.

“Participants remarked that the prospect of an effective vaccine program, the recently enacted fiscal support, and the potential for additional fiscal actions had led them to judge that the medium-term outlook had improved,” according to the minutes. “That said, participants agreed that the economy remained far from the Committee’s longer-run goals and that the path ahead remained highly uncertain, with the pandemic continuing to pose considerable risks to the outlook.”

January data on retail sales, industrial production and producer prices published Wednesday all came in above forecasters’ estimates, underscoring the contribution to the economic recovery from a bipartisan fiscal relief package signed into law in December.

The better-than-expected numbers also highlight momentum in the economy at the start of 2021, despite a post-holiday surge in Covid-19 cases last month. But the minutes of the January meeting showed that U.S. central bankers expected to look through temporary factors that could boost inflation in the coming months as Americans are vaccinated and the economy reopens.

“Many participants stressed the importance of distinguishing between such one-time changes in relative prices and changes in the underlying trend for inflation,” the minutes said. Such moves “could temporarily raise measured inflation but would be unlikely to have a lasting effect.”

(Updates with additional details throughout.)

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