Fed governor supports more rapid economic tapering

Federal Reserve Bank of New York Governor Christopher J. Waller said the Fed should taper its economic support at a faster pace as inflation concerns continue. 

“The rapid improvement in the labor market and the deteriorating inflation data have pushed me towards favoring a faster pace of tapering and a more rapid removal of accommodation in 2022,” he said Friday. The Federal Reserve Open Markets Committee earlier this month unanimously voted to reduce its monthly securities purchases from $120 billion to $105 billion as more people became vaccinated against Covid-19 and inflationary pressures remained. The committee expects to continue its massive support for the economy until maximum employment is reached and long-term inflation remains “moderately above” 2 percent. The Fed has increased its securities holdings by $4.2 trillion since March 2020 to more than $8 trillion, approximately 35 percent of annual real GDP.  

 Waller said if inflation continues for months, he “would become concerned that expectations would lead households to demand higher wages to compensate for expected inflation, which could raise inflation in the near term and keep it elevated for some time.”

Fed officials have said adjusting monetary policy for temporary considerations can lead to unintended adverse long-term consequences. Waller, however, called it “puzzling” to argue that monetary policy does not need to respond to temporary price pressures if they are “transitory.” He cited two consumer surveys — by the University of Michigan and New York Fed — showing medium inflation expectations running over 4 percent, and bond investments requiring more than 3 percent compensation for future inflation and inflation risks.

“It is very concerning to me that households and markets are no longer expecting us to keep inflation near our 2 percent target over the next three to five years,” he added. Reducing market liquidity could “free up balance sheet space in the event we need to expand it in the future to deal with economic shocks,” and “help maintain smooth market functioning,” Waller noted. 

As reported by Bloomberg, Federal Reserve Vice Chair Richard Clarida said last week that it could be appropriate for policymakers to discuss in December whether to speed up the tapering of bond buying. 

“I’ll be looking closely at the data that we get between now and the December meeting,” Clarida said in response to questions during a virtual event Friday.