Fed discussed pulling back on bond purchases

Federal Reserve officials last month discussed the idea of beginning to dial back their extraordinary support for the U.S. economy later this year, though they stopped short of a firm decision on a timetable.

The minutes of the Fed’s July 27-28 meeting, released Wednesday, indicated that the economic recovery from the pandemic recession was moving closer to achieving the central bank’s goals on inflation and employment. As a result, the Fed is edging toward an announcement that it will begin paring the pace of its Treasury and mortgage bond buying, which now amounts to $120 billion a month. These purchases have been intended to lower longer-term interest rates and encourage borrowing and spending.

“No decisions regarding future adjustments to asset purchases were made at this meeting,“the minutes said. Still, most of the Fed officials at last month’s meeting “noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year.”

At the same time, while economic progress is being made, the minutes noted that Fed officials expressed concern about the threat posed by rising COVID-19 cases stemming from the highly contagious Delta variant.

Participants noted “that the spread of the Delta variant may temporarily delay the full reopening of the economy and restrain hiring and labor supply,“the minutes said.

Based on the recent public comments of some Fed officials who favor a pullback soon in bond purchases, many economists have speculated that the central bank will announce in September a plan to begin tapering the bond buying later this year and wind it down over a period of months.

Analysts said they were more certain of such a timetable given the discussions revealed in the minutes released Wednesday.

“Absent a significant reversal in the strong jobs numbers or inflation data, the minutes reflect a Fed that is prepared to accelerate its taper timeline to perhaps the next few months,” said Sean Bandarian, an investment analyst for Cornerstone Wealth.

Andrew Hunter, senior U.S. economist at Capital Economics, said he thinks the Fed will begin scaling back the bond purchases this year “rather than early next year as we had previously thought.”

Gus Faucher, chief economist at PNC Financial, said he foresees the Fed announcing at its meeting in early November that it will begin tapering its bond purchases in December.