The Fed’s top official opens the door to a faster “phased in” bond-buying program

The vice chair of the US Federal Reserve on Friday opened the door to a faster withdrawal of its massive bond-buying program, suggesting that the central bank could take action sooner than expected to tame inflation.

Richard Clarida said the FOMC could consider discussing the planned “taper” pace at its next policy meeting in December.

Earlier this month, the Fed started let down Its purchases of $120 billion per month in Treasury securities and mortgage-backed securities for agencies, and said it intends to reduce them by $15 billion per month. This puts it on track to remove the stimulus completely by the middle of next year.

At the time, the Fed said it was “prepared to adjust the pace of the ‘tapping process’ if changes in economic outlook warrant it.”

On Friday, Clarida reiterated his view that he sees “upside risks” to inflation and expects “very strong” growth in the fourth quarter of 2021.

“I will be looking closely at the data we get between now and the December meeting, and at that meeting it may be appropriate to have a discussion about increasing the pace at which we are decreasing our balance sheet” at an event hosted by the San Francisco Reserve Bank, he said.

A faster withdrawal of the asset purchase program could pave the way for an earlier time Interest rate Since Jay Powell, Fed Chairman, said the central bank would likely avoid adjusting its policy rate while still buying government bonds.

Earlier on Friday, Federal Reserve Governor Christopher Waller said he favored a faster gradual rate cut, which would give the central bank more flexibility to raise interest rates “if needed”.

“The rapid improvement in the labor market and deteriorating inflation data has led me to favor a faster pace of decrement and faster accommodation removal in 2022,” he said at an event hosted by the Center for Financial Stability.

The price of short-term government debt tracked every word of policy makers and Clarida’s comments sent echoes across the $22 trillion Treasury market.

The yield on the two-year bond, the most responsive to the Federal Reserve’s policy shifts, jumped 0.05 percentage points from its lowest level earlier in the trading session when Treasuries were rising. At 0.49 percent, it was just below the 20-month high hit earlier this week. Yields rise when the price of the bond falls.

Implied rates on federal funds futures also rose after Clarida’s comments, with traders pricing in a full quarter point rate increase by the Fed by July.

US stocks weakened in the wake of the report, with the S&P 500 retreating from an earlier advance that had pushed the index to a new record high, trading 0.1 percent lower in the middle of the afternoon.

Ashish Shah, chief investment officer for fixed income at Goldman Sachs Asset Management, said he believed the central bank was trying to give itself more flexibility to respond to economic data, including the highest inflation readings in 30 years.

“The Fed will become more data-dependent over time and we expect policy uncertainty to rise as we approach the second half of next year after emerging from a gradual deterioration,” he said.

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