Fed Minutes July 2021: Officials Debated Timing of Taper

on Aug18
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Federal Reserve officials are preparing to slow the central bank’s large purchases of government-backed bonds, the first step toward a more normal monetary policy setting as the economy heals from the pandemic, and notes from their latest meeting provided insight into the policy debate over when that should happen.

Minutes from their July 27-28 meeting showed that Fed officials generally thought they would soon meet their standard for slowing bond purchases — “substantial further progress” toward the central bank’s maximum employment and inflation goals.

“Most” of them “judged that the standard set out in the committee’s guidance regarding asset purchases could be reached this year,” the release showed. But precisely when remained a matter of active debate.

Some officials at the meeting pushed the Fed to get moving sooner, the account of the meeting released Wednesday showed, while others stressed a need to wait.

“Some” officials wanted to slow bond purchases soon to guard against the risk of higher inflation, and “a few” were worried that continued big purchases could lead to financial system risks. But “a few” others argued for a slower process, stressing that rising Delta variant coronavirus cases posed risks to the economic outlook, and “several” worried that in coming years inflation — though high today — could dip to uncomfortably low levels again. “Several” pointed to big lingering uncertainties, like when workers would return to jobs.

The snapshot of Federal Open Market Committee deliberations comes ahead of the central bank’s closely watched annual gathering, an economic symposium in Jackson Hole in Wyoming that will take place next week. Jerome H. Powell, the Fed’s chair, will deliver a speech at the event, and many investors expect that he could provide hints or details about the central bank’s coming policy move.

The Fed is still holding interest rates near zero and plans to do so until the labor market is more fully healed, which means monetary policy will continue to support the economy even once the bond buying begins to slow. Fed officials have suggested that they may favor raising interest rates in 2022 or 2023, depending on the pace of the recovery.

Mr. Powell and his colleagues are working against a complicated backdrop as the economy grows rapidly and inflation and asset prices pop, but the job market recovery remains incomplete.

Prices climbed 4 percent in the year through June, based on the Fed’s preferred gauge of inflation, as pandemic-affected categories pushed increases far above the central bank’s 2 percent average target. At the same time, nearly 7 million jobs are still missing compared with employment levels at the start of the pandemic, in February 2020.

Some officials who are eager to soon start the taper of bond purchases have emphasized that moving early will allow the Fed to be more flexible when it comes to raising borrowing costs. The Fed is currently buying $120 billion in Treasury and mortgage-backed debt each month, and officials have said they would prefer to bring that policy to a close before lifting the federal funds rate.

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