With the economy “very strong” and “high” inflation pressures, it makes sense for Federal Reserve officials to accelerate the taper of asset purchases, Fed Chairman Jerome Powell said Tuesday.
“The economy is very strong and inflationary pressures are high and it is therefore appropriate, in my view, to consider wrapping up the taper of our asset purchases…perhaps a few months sooner,” Powell said, during testimony to the Senate Banking Committee.
Earlier this month, the Fed started to taper its asset purchase program at a $15 billion per-month pace. This would bring the purchases to an end in June. According to the minutes of the meeting, some Fed officials preferred a faster pace of reductions.
In his testimony, Powell only backed a discussion of accelerating the pace of tapering.
Fed watchers think the Fed will discuss doubling the pace of tapering to $30 billion per month, so that the purchases end in March.
St. Louis Fed President James Bullard, one of the Fed officials in favor of a faster pace of tapering earlier this month, says he want the Fed to be in the position to raise interest rates in mid-2022 if higher inflation persists.
In a column published Tuesday, Bullard said he sees a 50% chance that inflation does not dissipate as much as expected, or perhaps not at all, without additional Fed policy action.
The Fed will meet to set its taper policy on Dec. 14-15. Powell said the Fed would learn more about the new omicron variant and inflation and the labor market over the next two weeks.
Fed watchers saw a clear shift in Powell’s tenor about inflation.
“The tone of his remarks was notably hawkish,” said Krishna Guha, vice chairman of Evercore ISI, in a note to clients.
“The Fed’s primary focus is on the risk of persistent excess inflation, which omicron might aggravate, and not downside risks to activity from the variant,” Guha added.
Powell said he thought “the threat of persistently higher inflation has grown.”
Asked about his repeated assertion earlier this year that higher inflation would be “transitory,” Powell said “it’s probably a good time to retire that word.” High inflation won’t subside until the second half of 2022, he said.
Powell tied stable prices to the desire to return the labor market to its pre-pandemic strength.
“To get such a healthy job market, we’re going to need a long expansion and to get that, the economy needs to have stable prices, he said.
On more than one occasion during his testimony, Powell vowed the Fed would use its tools so that inflation is not entrenched.