Fed to speed up bond-buying taper, Powell indicates

• Powell said tapering could wrap up “a few months sooner” than anticipated

• He also mentioned, “it’s probably a good time to retire” the word “transitory” to describe inflation

Fed Chair Jerome Powell on Tuesday indicated that the central bank could weigh removing pandemic support at a faster pace to boost the economy as it battles mounting inflationary pressures.

In an appearance before the Senate Banking Committee, where both Democrats and Republicans expressed concerns about high prices, Powell said he thinks reducing the pace of monthly bond purchase can move more quickly than the $15 billion-a-month schedule announced earlier this month.

Powell, who was selected as Fed chief for another four-year term last week by President Biden, said he expects the issue to be discussed at the December meeting. “In those two weeks, we are going to get more data and learn more about the new variant.”

“At this point, the economy is very strong and inflationary pressures are higher, and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases, which we actually announced at the November meeting, perhaps a few months sooner,” he said. “I expect that we will discuss that at our upcoming meeting.”

The initial bond buyback tapering was scheduled to wrap up by mid-June 2022; if the committee chooses to accelerate, the process will close earlier in the spring, giving the Fed a scope to raise interest rates anytime afterward.

Market reaction

The market reacted following Powell’s comments while government bond yields rose. The remarks added worry to a market that was already wary over the emergent omicron variant of COVID-19.

The Dow Jones Industrial Average fell as much as 680 points, or nearly 2%, to 34,456.79.

The S&P 500 also dropped about 2%, to 4,565.19. The Nasdaq Composite dropped 331 points, or 2.1%, to 15451.38.

The indexes dropped to their session lows on Tuesday, reversing Monday’s rebound, as investors reassessed risks associated with the new strain of coronavirus.

The 10-year Treasury yield fell to 1.44% after losing 9 basis points as investors worried about the economy slowing due to the omicron COVID-19 variant. The yield on the 10-year Treasury was as high as 1.69% last week before Friday’s drop below 1.5%.

Bond purchase tapering

Following its November meeting, the Federal Open Market Committee (FOMC), which sets monetary policy including interest rates, said the pace to taper the bond purchase would be around $15 billion a month — $10 billion in Treasuries and $5 billion in mortgage-backed securities.

However, the post-meeting statement indicated that would be the case for November and December but noted it “is prepared to adjust the pace of purchases if warranted by changes in the economic outlook.”

It also indicated that committee members were also prepared to start raising interest rates if inflation persists.

The Fed had been buying at least $120 billion a month — $80 billion in Treasuries and $40 billion in MBS.

Powell said the bond-buyback, which has added $4.5 trillion to the Fed’s $8.73 trillion balance sheet, has been “supporting economic activity.”

“The need for that has clearly diminished as the economy has continued to strengthen, as we’ve seen continued significant inflationary pressures, and that’s why we announced that we would taper, and it’s why we’re now saying we’re going to discuss a somewhat faster taper at our next meeting,” Powell said, mentioning that the tapering should not be seen as an indication that rate increases are looming.

‘Transitory’ inflation

Since the last FOMC meeting in November, reports showed that inflation in the U.S. has been running at its highest pace in more than 30 years.

During Tuesday’s hearing, Powell faced multiple questions about inflation and the Fed’s policy adjustments to deal with the issue.

Fed officials have long maintained that inflation is “transitory,” however, the chair thinks it’s probably not useful anymore.

“The word transitory has different meanings for different people. To many, it carries a sense of short-lived. We tend to use it to mean that it won’t leave a permanent mark in the form of higher inflation,” Powell said. “I think it’s probably a good time to retire that word and try to explain more clearly what we mean.”

Powell vowed the Fed would be vigilant in controlling inflation.

“You’ve seen our policy adapt, and you’ll see it continue to adapt. We’ll use our tools to make sure that higher inflation does not become entrenched,” he said.

Picture Credit: NBC News