Fed’s Clarida Affirms Fed Plans to End Bond Purchases by Mid-2022

With the economy shutting down, the Fed cut its short-term benchmark rate to near zero when the coronavirus pandemic hit the U.S. in March 2020. It has been purchasing at least $120 billion a month in Treasury and mortgage bonds since June 2020 to provide additional stimulus.

Mr. Clarida’s remarks signaled the central bank is likely to announce plans to gradually shrink those purchases at its two-day meeting starting Nov. 2.

Rising vaccination rates and nearly $2.8 trillion in federal spending approved since December have produced a recovery like none in recent memory. Inflation has soared this year, with so-called core prices that exclude volatile food and energy categories up 3.6% in August from a year earlier, using the Fed’s preferred gauge. The gains largely reflect disrupted supply chains and shortages associated with the reopening of the economy.

Mr. Clarida said he still expects that the underlying rate of inflation in the U.S. economy “is hovering close to our 2% longer-run objective and, thus, that the unwelcome surge in inflation this year, once these…bottlenecks have unclogged, will in the end prove to be largely transitory.”

But he added that he and most of his colleagues believe the risks are tilted toward inflation running at higher-than-anticipated levels. If the Fed sees evidence that households and businesses are beginning to expect higher inflation, that would fuel concerns about more-persistent price increases that would call for rate rises, Mr. Clarida said.

“Monetary policy would react to that,” he said. “But that is not the case at present.”

Projections released at the end of the Fed’s two-day policy meeting last month showed half of 18 officials expect to raise interest rates by the end of 2022. In June, just seven officials anticipated that, with most instead penciling in rate increases in 2023. The projections showed several officials expected somewhat higher inflation next year than they had in June and nearly all penciled in more rate increases in 2023.

A recent surge in coronavirus cases related to the more transmissible Delta variant has further clouded the outlook in recent months by potentially intensifying the challenges of slower growth and higher inflation.

Write to Nick Timiraos at [email protected]