Some Federal Reserve officials argued that the US central bank should chart a path towards curtailing some of its vast monetary support to the economy if the recovery accelerates further.
According to minutes of the Federal Open Market Committee’s meeting in late April, officials generally said the US economy remained “far” from its twin goals of full employment and price stability, and still required very loose monetary policy. But several argued that the time might come relatively soon this year for the Fed to change its stance.
“A number of participants suggested that if the economy continued to make rapid progress toward the committee’s goals, it might be appropriate at some point in upcoming meetings to begin discussing a plan for adjusting the pace of asset purchases,” the minutes said.
The Fed, under chair Jay Powell, is currently buying $120bn of Treasury securities and agency mortgage-backed securities each month, and has vowed to continue at that pace until it sees “substantial further progress” towards its inflation and employment targets.
The minutes underscored the central bank’s commitment to handle any policy transition with care — suggesting a more cautious approach than the one taken by former Fed chair Ben Bernanke in 2013, whose discussions about withdrawing policy support sparked a so-called taper tantrum that led to sharply tighter financial conditions globally.
“Many participants highlighted the importance of the committee clearly communicating its assessment of progress toward its longer-run goals well in advance of the time when it could be judged substantial enough to warrant a change in the pace of asset purchases,” the minutes said. “The timing of such communications would depend on the evolution of the economy and the pace of progress toward the committee’s goals.”
A sell-off in US government bonds resumed on Wednesday, sending yields higher. The yield on the benchmark 10-year Treasury note was 0.05 percentage points higher at 1.69 per cent.
Shorter-dated bonds also joined in the selling, with the yield on the two-year note climbing 0.02 percentage points to 0.35 per cent. The five-year note jumped roughly 0.05 percentage points to 0.86 per cent.
“They don’t publish this stuff without knowing that this has an impact,” said Kathy Jones, chief fixed-income strategist at Charles Schwab. “It is the first hint, but it will be a gradual process. All the language is conditional. They are leaving themselves a lot of flexibility.”
Unhedged — Markets, finance and strong opinion
Robert Armstrong dissects the most important market trends and discusses how Wall Street’s best minds respond to them. Sign up here to get the newsletter sent straight to your inbox every weekday
The late April FOMC meeting was held before a relatively weak jobs report and data showing a jump in consumer prices raised concerns about labour mismatches and rising inflation, complicating predictions for the trajectory of the US recovery from the pandemic.
Most US monetary policymakers maintained a relatively sanguine approach to inflation. The “surge in demand as the economy reopens further” would make consumer price inflation run “somewhat above” 2 per cent, but “after the transitory effects of these factors fade, participants generally expected measured inflation to ease”, according to the minutes.
“Looking further ahead, participants expected inflation to be at levels consistent with achieving the committee’s objectives over time.”