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Fed Debated Timing, Mechanics of Stimulus Pullback at July Meeting
2021-08-18 18:00:44.425 GMT

By Nick Timiraos

(Dow Jones) — Federal Reserve officials ramped up deliberations last month
over how and when to start pulling back their extraordinary support for an
economy growing more rapidly than they expected earlier this year.

Minutes of their July 27-28 Fed meeting, released Wednesday, also shed light
on how policy makers judged the risk that inflation would run above their 2%
target for longer than they had anticipated.

Fed officials have been seeking consensus on whether to begin scaling back
their $120 billion in monthly purchases of Treasury and mortgage securities.

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 between 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 nick.timiraos@wsj.com

(END) Dow Jones Newswires

To view this story in Bloomberg click here:
https://blinks.bloomberg.com/news/stories/QY1RD8073NCX