There is growing support within the Fed to announce the reduction in bond purchases in September

Changing political views amid unexpected economic data allowed the Federal Reserve to announce in September its decision to cut back on asset purchases and start cutting back on purchases about a month later.

Interviews with officials along with their public comments show growing support for a faster reduction schedule than markets forecast a month ago. These shifting views follow strong employment data from the past two months as well as higher inflation readings.

Fed Governor Christopher Waller and Fed Chairmen Eric Rosengren, Robert Kaplan and Jim Bullard all publicly called for a cut in September. Atlanta’s Raphael Bostic supported starting the cut between October and December, suggesting he might favor an ad in September as well. The group is not known to be hawks and, in fact, some were among those who made the first calls for historic action by the Fed to support the economy at the start of the pandemic.

The Fed could still postpone the decision to the November meeting if August employment data is weak, if the delta variant triggers a new round of economic lockdowns, or if inflation readings ease. But stronger-than-expected inflation data last week, along with expectations that it could stay high next year, added support to the earlier announcement of the cut.

Markets have also shifted expectations, giving the Fed leeway to act sooner. Respondents to the Fed’s CNBC survey in July set November as the reporting month and January as the start of the decline. But a Reuters poll last week found September to be the new consensus.

Fed Chairman Jerome Powell has generally been more accommodating than some of his committee members have been, although he has not spoken since the recent data release. Powell hinted that he might be persuaded to go earlier. Although he insisted that most of the inflation would be temporary, he also said: “We have to take the risk issue seriously, that inflation will be more persistent.”

Inflation figures from last week showed some moderation in consumer prices, but increasing inflationary pressures at the wholesale level. Some Fed officials are now forecasting a rise in inflation that could persist into the next year.

Powell said in his July press conference that the Fed was still “some distance” from further substantial progress needed to decrease, but that was before the July jobs report showing more than 900,000 jobs added. , upward revisions for May and June and forecasts for continued strong wage growth. He also said the decision to cut would be left to the committee. Additionally, Powell suggested that the delta variant did not pose much risk to the economy.

Until recently, Powell’s main goal was to avoid a taper tantrum, a repeat of the sharp 2013 bond market liquidation triggered by Fed Chairman Ben Bernanke speaking of a possible reduction in asset purchases. . But Powell seems to have achieved this goal. Fed officials have been talking openly about tapering for several months now and stocks have risen and bond yields, while volatile, have remained generally low.

Meanwhile, expectations for rate hikes starting in late 2022 or early 2023 have remained almost unchanged amid all the talk about tapering. This suggests to Fed officials that they have achieved their goal of divorcing the minds of the market over a decision to back out of a decision to raise rates.

A reduction in September could also meet Powell’s criteria of giving markets advance notice. The Fed admitted discussing the cut at its June and July meetings. A September announcement with tapering starting in October or November, would equate to four or five months notice

A September decision could face opposition from several more conciliatory members of the committee. Chicago Fed Chairman Charles Evans said last week he wanted to see “a few more months” of employment data before making a decision. Fed Governor Lael Brainard has indicated that she wants to see data on school openings and economic data for September.

Such differences are typical of the Fed around political turns, and it is up to the President to forge consensus or move forward with dissent. It looks like Powell could face dissent in September with either decision. Powell might find support among doves with slower taper, for example, one taking 10 months instead of eight. Or he could appease the hawks with a faster cut and a delayed announcement.

And the markets can still have more to say. Because the Fed has said it will cut before raising rates, a cut decision will immediately open the floodgates to discuss the first rate hike, which could push forward rate hike expectations and tighten financial conditions more. quickly than the Fed prefers.