Financial markets “are very well prepared” for the Federal Reserve to start tapering its massive asset-purchase program in the fall, St. Louis Fed President James Bullard said, adding he’d want it to be completed by the end of the first quarter of 2022.
“They’ve been expecting it, and they don’t really think asset purchases are that effective in this environment,” he said in an online event on Friday. Markets “are very much ready for the taper to go ahead this fall,” Bullard said.
“I wouldn’t want to shock markets or anything but get the paper finished. I would have a target of finishing by the end of the first quarter next year,” Bullard said. “And then at that point, we’ll see where we are with respect to labor markets and see if inflation is moderating and see if labor markets are coming back.”
Since last September, the Fed has set the amount of its monthly purchases of Treasuries at $80 billion and mortgage-backed securities at $40 billion to help the economy heal from COVID-19. Fed officials are moving closer to when they can start reducing massive support for the U.S. economy, though Chair Jerome Powell said this week there was still some way to go.
Bullard’s timetable for reducing the purchases is considerably faster than has been suggested by other Fed officials or the plan expected by economists. In a survey prior to this week’s policy meeting, economists expected the committee would announce a tapering formally by December and start the taper in early 2022.
Consumer prices are rising at the fastest pace since 2008 as the economy reopens and American renew spending after more than a year of lockdown. The key gauge that the Fed uses for its inflation target climbed 4% in June from a year earlier, the fourth straight month in which it exceeded the 2% goal.
“Inflation is going to moderate, but we don’t know how much it’s going to moderate, and if it doesn’t moderate them we’re going to have to gently bring inflation back down to 2%,” Bullard said. This is “a good time to get going and get the process finished at the end of the first quarter next year,” he said.
Bullard, who isn’t a voter on the rate-setting Federal Open Market Committee this year but will be in 2022, sees inflation slowing to a range of 2.5% to 3% in 2022.
