Fed’s Waller favours a faster pace of tapering on inflation surge

Federal Reserve Governor Christopher Waller said the US central bank may have to quicken the wind-down of its asset purchases and pivot off near-zero interest rates faster if job growth remains robust with inflation far above the central bank’s 2% target.“The rapid improvement in the labour market and the deteriorating inflation data have pushed me towards favouring a faster pace of tapering and a more rapid removal of accommodation in 2022,” Waller said on Friday in New York at an event sponsored by the Center for Financial Stability. “I believe that policy may need to pivot to a faster taper based on incoming data that I will be monitoring.”No governor has dissented from a monetary-policy decision since 2005, and board members often stake out positions in line with the broader consensus. Shortly after Waller’s remarks, Fed Vice Chair Richard Clarida said at a separate event that it may be appropriate for policy makers to discuss next month whether to speed up the tapering of bond buying.Waller’s comments emphasised that both the bond-purchase runoff and the timing of rate increases are flexible policy tools that the Federal Open Market Committee could adjust if necessary. US central bankers are worried about accelerating inflation as consumer prices rose 6.2% last month, the fastest annual pace since 1990, while households are pushing up their expectations of future inflation.Fed policy makers announced November 3 they had agreed to begin reducing monthly bond purchases – which were designed to boost the economy by suppressing borrowing costs – by $15bn a month. They also pledged to keep interest rates around zero until the economy achieves full employment. Waller said the committee’s inflation goal has been met and he sees the labour market recovery proceeding at a strong rate.Even if the inflation forecast suggests price pressures could ease in a year, “sitting around waiting for this to disappear is not necessarily the optimal policy response,” he said in a question-and-answer period following his speech.Waller said he didn’t see why a faster taper should roil bond markets – recalling the “taper tantrum” in 2013 – because it is “not true” that an immediate interest-rate increase would follow the end of asset purchases.The unemployment rate stood at 4.6% in October and Fed Chair Jerome Powell said at his press conference this month that the labour market recovery is incomplete. Black unemployment was 7.9% last month and measures of labour-force participation for workers age 25 to 54 are about a percentage point below pre-pandemic levels.Waller said the labour market “is rapidly approaching maximum employment” and he added that he expects the supply of labour to improve as demand continues strong. He said recent labour negotiations may be showing some cost-of-living adjustments, in response to a question.If Covid-19 or “some other factor substantially slows the recovery, hindering the progress toward maximum employment, the FOMC could slow the taper,” Waller said. “But if the economy makes quick progress toward maximum employment or inflation data show no signs of retreating from their currently high readings, the committee may choose to speed up the taper, which would position it to accelerate subsequent steps in tightening monetary policy if necessary.”Other Fed officials have been in no hurry to speed up the taper. Richmond Fed President Thomas Barkin said on Monday the central bank can be “patient” in assessing the taper and “it’s very helpful for us to have a few more months to evaluate.” Minneapolis Fed President Neel Kashkari on Monday said, “We shouldn’t overreact to what is likely going to be a temporary factor.”St Louis Fed President James Bullard said this week that the central bank should speed up its reduction of monetary stimulus.Waller is an appointee of former President Donald Trump and one of the few governors who will remain as the board turns over, with four of seven seats in play. Randal Quarles, the vice chair of supervision, has said he will leave the Fed by the end of the year, and Clarida’s term expires at the end of January.President Joe Biden is considering Chair Jerome Powell for another four-year term, and has also interviewed Fed Governor Lael Brainard for the top job. There is also an empty seat to fill on the board.