Federal Reserve Bank of San Francisco President Mary Daly said that she could support more quickly ending the central bank’s asset purchase program, dependent on incoming data on inflation and jobs.
Since the depths of the pandemic, the Fed has been buying about $120 billion in U.S. Treasuries and agency mortgage-backed securities to signal its commitment to supporting the economy. This month, the Fed said the economy appeared to make substantial further progress in the recovery — and began slowing those purchases at a clip of about $15 billion per month.
But Daly told Yahoo Finance that if the November jobs report and the Consumer Price Index read on inflation show no reversal of existing trends, she would support paring back those purchases at a faster speed.
“If things continue to do what they've been doing, then I would completely support an accelerated pace of tapering,” said Daly in an exclusive interview on Tuesday.
Both of those reports will come before the policy-setting Federal Open Market Committee’s next meeting on Dec. 14 and 15. Daly is a voting member of this year’s committee.
Daly’s remarks follow commentary from other Fed officials who have similarly suggested that they would be open to accelerating the pace of taper as soon as the next meeting.
Richmond Fed President Tom Barkin told Yahoo Finance on Nov. 15 that he would like to see more data as well, but wanted to leave the option open to pull forward policy actions if inflationary pressures ended up stickier than expected.
“If the need to act is there, we'll do what we need to do,” Barkin said.
Fed Governor Christopher Waller said on Nov. 19 that he would support a conversation to wind down the taper process faster.
"My preference was to go early and go fast on tapering. I lost the 'go early' part but we can still go faster,” Waller said.
One or two rate hikes next year?
Daly said accelerating the taper process would allow the Fed to push for a “normalization of policy,” pointing to the optionality to raise interest rates after asset purchases come to a full stop.
“With the level of growth, the rate of growth we have, the really positive jobs numbers, and obviously the eye-popping and too-high inflation, then adding support to an already robustly-growing economy just isn't what we want to do,” Daly told Yahoo Finance.
At the FOMC in a few weeks, Daly will have to submit her projections for where interest rates could be headed over coming years. Daly said “it wouldn't surprise me at all if it's one or two [25 basis point hikes] at the latter part of next year,” but cautioned that her forecast could change depending on how the data comes in.
But the San Francisco Fed chief emphasized that she will be mindful of not tightening policy too soon. Raising short-term borrowing costs on the nation’s employers risks disrupting the labor market recovery, where over 4 million people remain out of work compared to pre-pandemic levels.
Daly said she would not want to pull the economic support to get ahead of inflationary factors just as COVID-related pressures on supply chain bottlenecks are alleviated.
“If we do that, we could leave millions of Americans on the sideline and ratchet back the economy in a time when the COVID-related factors are causing inflation to come down a bit,” Daly said.
Her colleagues may prove critical through the “normalization” effort, but the Biden administration cleared up some uncertainty over who those colleagues will be. On Monday morning, the president renominated Jerome Powell to serve as Fed chair and nominated Fed Governor Lael Brainard for vice chair.
“These are two terrific choices, and I look forward to working with them if the Senate approves them,” Daly said.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.