Fed, nearing bond-buying taper, remains divided over inflation Reuters - Despite a broadly shared view that the U.S. labor market has healed enough to allow the Federal Reserve to start reducing its monthly bonds purchases as soon as next month ; policymakers remain divided over inflation and what they should do about it.
The U.S. government reported on Thursday that producer prices rose 8.6% in the 12 months following September, the biggest gap in year-on-year growth for nearly 11 years. Data released on Wednesday showed that U.S. consumer prices shot up 5.4% over the same period.
St. Louis Fed President James Bullard described the trend as concerning at a virtual gathering of the Euro 50 Group on Thursday night. While I don't do think there is any probability that this will naturally be dissipating over the next six months, I would not say that was such a strong case we can count on that happening, Bullard said, adding that he gives it about 50% chance.
Bullard has been pushing for the Fed to start reducing its monthly deposits of Treasuries and mortgage-backed securities next month, while minutes from the U.S. central bank's Sept. 21 - 22 policy meeting show policymakers are generally in support of doing so, with plans to wrap up the process by the middle of 2022.
Bullard wants the Fed to end the bond purchases by the first quarter of 2022 to allow the Fed to raise interest rates as soon as the spring if inflation remains uncomfortably high.
The Fed has promised to keep its benchmark overnight lending rate at the current near-zero level until the economy reaches full employment and inflation has not only reached its 2% goal, but is on track to maintain modestly above that level for some time.
The central bank set the parameters when inflation had been running above 2% for years and the challenge was seen as lifting it up rather than tamping it down.
The opposite problem is rising now that pent-up consumer demand fuels spending in a reopening economy and businesses that are bound by supply bottlenecks struggle to keep up.
In a message addressed to South Dakota State University on Wednesday, Fed Governor Michelle Bowman sounded the alarm on inflation and her worries that easy monetary policy is helping feed high prices as well as possible asset bubbles. Bowman also urged a start to the bond buying taper next month.
The San Francisco Fed President Mary Daly, one of the central bank's most dovish policymakers, told CNN International on Thursday that inflation is not tied to monetary policy at this point in time and that tightening policy is unlikely to do much to bring it down.
Daly said prices are going to last as long as COVID is with us because they are caused by supply-chain bottlenecks by pandemic-related disruptions and inflation would subside once the pandemic happened.
It is premature to discuss rate increases, Daly said, noting, however, that the point had been reached where we feel like we can dial back the level of support we are adding to the economy.