“While the Fed is an independent institution, its leadership, up for reappointment next year, could not totally ignore the dim view the administration and Democratic Congress would take toward a shift to a more pre-emptive policy stance,” Deutsche Bank chief economist David Folkerts-Landau and colleagues wrote in a June 7 report.
Some three-quarters of economists surveyed by Bloomberg last week said they expect the Fed to announce between August and year-end that it will begin paring its purchases, with one-third forecasting it won’t fire the starting gun until December.
It’s not just the timing of the taper that’s up for discussion. So too are its composition and pace.
The Fed has faced criticism from within and outside the organization for continuing to buy $40 billion of mortgage-backed securities per month while house prices are surging. Vice Chair Randal Quarles said last month that the Fed would “certainly” look at that issue in the context of its taper discussions.
Steady Pace
The last time the Fed wound up a quantitative easing program, in 2014, it shrank its asset purchases at a steady pace.
“Investors may be lulled into a false sense of security by that experience,” former Fed official William English told a June 8 Deutsche Bank webinar. Given all the uncertainty surrounding the post pandemic economy, “it’s not necessarily going to be the case that the Fed is going to taper in steady steps.”
Much may depend on the financial markets. American Enterprise Institute resident fellow Desmond Lachman said the ultra-easy monetary policy being pursued by the Fed and other major central banks has led to an “everything asset price bubble,” with stock, credit and housing markets all frothy.
“The chance of the bubble bursting is all the greater if the Fed is behind the curve,” he said.
English, who is now at the Yale School of Management, said it’s going to be politically hard for the Fed to wind up its asset purchases and increase interest rates because that will boost the government’s borrowing costs.
“The Fed is going to come under a lot of criticism for raising rates and making budget choices for the Congress considerably tougher,” he said, adding, “At some level, the Fed needs to both normalize policy but also normalize its relationship with the government.”
This article was provided by Bloomberg News.