Fed ready to begin asset tapering amid US economic recovery: Analysts

ANKARA

Possibly as soon as this week, the US Federal Reserve is ready to begin asset tapering, the process to reduce its asset purchases, amid the recovery in the American economy, analysts told Anadolu Agency.

Ryan Sweet, a leading US economist at Moody's Analytics, told Anadolu Agency via email that he expects the Fed will likely begin reducing its $120 billion in monthly asset purchases at the conclusion of its two-day meeting this Wednesday – a month earlier than the baseline forecast.

"The acceleration in consumer prices has turned up the heat on central banks across the world, and the Fed hasn’t been immune," he said.

"The Fed’s monthly asset purchases weren’t inflationary, therefore tapering won’t be disinflationary. However, it could help keep market-based measures of inflation expectations anchored, since tapering is the preamble to the Fed beginning to tighten monetary policy by allowing its balance sheet to decline and/or by increasing the target range for the Fed funds rate," he explained.

The Fed on Sept. 22 opened the door to start asset tapering before the end of this year, and Chairman Jerome Powell later said the process would likely conclude by the middle of 2022.

On Oct. 22 he said that the bank is on track to begin reducing its asset purchases, adding: "We need to watch carefully to see whether the economy is evolving with our expectations."

- High inflation

"Powell did sound a little more concerned about near-term inflation, highlighting that the risks are toward longer and more persistent supply chain bottlenecks and higher inflation," Sweet observed.

"He had been consistently in the camp that the acceleration in inflation was transitory. Powell hasn’t completely bailed on this but the ongoing issues in global supply chains and the recent runup in energy prices will delay the deceleration in US inflationary pressures," he added.

The US consumer price index (CPI) in September rose 0.4% from the previous month and 5.4% from the same period last year, while the producer price index (PPI) climbed 0.5% on a monthly basis and 8.6% annually, according to the latest Labor Department figures.

"None of Powell’s comments imply that the Fed is in a hurry to raise the target range for the Fed funds rate, as it has learned from its past mistakes that fluctuations in energy prices have a temporary effect on realized inflation," Sweet said.

While the Fed is trying to keep tapering separate from raising interest rates for the moment, it indicated on Sept. 22 that its first rate hike, of 25 basis points, may come next year, and there could be four more rate hikes in 2023 of 0.25% each, according to its latest projections.

- Labor market conditions

Although the US economy is recovering from the coronavirus pandemic, the Fed is also closely watching labor market conditions in addition to inflation. The world's largest economy added only 194,000 jobs in September, while 7.7 million people are still jobless as of last month, according to the latest Labor Department figures.

"The soft September employment gain was due to the fallout from the Delta variant. With Delta now fading quickly, expectations are that job growth will quickly rebound in coming months," Mark Zandi, chief economist at Moody's Analytics, told Anadolu Agency via email late last week.

Zandi said it is unlikely the Fed would wait until December to announce that it will begin tapering, as they have already prepared markets for this, adding: "The bar for them to go off this script is high."

"I expect the Fed to announce at next week’s meeting that it will likely begin tapering its bond-buying in December. Motivating this is the fading of the Delta wave of COVID-19 and the strengthening of the economic recovery," he said.

"Inflationary pressures and high asset values also argue for the Fed to begin taking its foot off the monetary accelerator," he added.

Sweet said job growth in the US has slowed over the past couple of months due to the Delta wave but added that "the labor market isn’t weak."

"Job growth will reaccelerate through the remainder of this year and into next,” he said. “Labor supply issues have also been binding, putting upward pressure on wages. Strong wage growth should pull more people back into the labor force, helping reduce of the labor supply constraints.”