Fed Signals Asset Purchases Likely to Slow This Year

“Most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year,” the minutes said.

The minutes said several officials favored reducing asset purchases in the coming months in order to better position the Fed to potentially raise rates if the economy strengthens further next year, while others thought the Fed could wait until early next year because they want to see stronger evidence that the job market has healed from the pandemic.

Fed officials expected a temporary burst in inflation as the economy struggles to supply enough goods and services to keep up with demand this year. But the spurt has been stronger and broader based than officials expected. On a 12-month basis, the Fed’s preferred inflation gauge, after excluding volatile food and energy categories, rose 3.5% in June, a 30-year high.

The Fed cut interest rates to zero last year and began purchasing $80 billion a month in Treasury securities and $40 billion in mortgage securities to provide added stimulus. Officials in December said they would want to see “substantial further progress” toward meeting their goals of inflation that averages 2% over time and labor market conditions consistent with full employment.

Officials said in a statement at the conclusion of their meeting last month that “the economy has made progress” toward the Fed’s goals. While officials want to see more hiring before pulling back on bond buying, “there’s a range of views on what timing will be appropriate,” Fed Chairman Jerome Powell said in a July 28 news conference.

Officials also must consider the pace of any reductions. During a prior asset-purchase program that ended in 2014, the Fed shrank its purchases in modest equal amounts over the course of 10 months. Several officials have said recently they would prefer a faster pace of reductions this year because the economy is making more rapid progress toward the bank’s goals.

Mr. Powell has to forge a consensus among the 17 other officials who participate in regular meetings of the Fed’s rate-setting committee. Some are concerned that the burst of inflation this year from bottlenecks associated with reopening the economy will prove more durable. They are also worried that the Fed’s bond buying is exacerbating these pressures by stimulating demand.

Another camp thinks recent price pressures will subside and could leave the Fed in the same position it faced for much of the past decade, during which global forces kept inflation below 2% even with historically low interest rates. They are worried that accelerating plans to wind down the asset purchases could lead investors to question whether the Fed is in a hurry to raise rates or less committed to achieving lower unemployment.

Write to Nick Timiraos at [email protected]