Fed Governor Waller sees reduction in bond purchases possibly starting in October

The Federal Reserve could start curbing its bond purchases as early as October, according to a scenario central bank governor Christopher Waller presented to CNBC in a Monday interview.

Should the job report for August and September show growth in the 800,000 range, it would bring the US economy near its pre-pandemic levels and, Waller said, meet the Fed’s benchmark for starting tightening.

“In my opinion, this is a significant step forward and I think you might be ready to make an announcement in September,” he told CNBC’s Sara Eisen on Closing Bell.

“That depends on what the next two job reports do,” he added. “If they’re as strong as the last one, then I think you’ve made the strides you need. If not, you’ll probably have to postpone things for a few months.”

The number of non-farm workers rose by 850,000 in July and is expected to grow by 788,000 in August, according to the latest Dow Jones estimate. The U.S. economy has regained 15.6 million jobs since May 2020, after losing 22.4 million in the first two months of the pandemic.

Despite the rapid pace of recovery, the Fed has retained its ultra-loose monetary policy instruments from the time of crisis, including key interest rates close to zero.

However, Waller said the time is approaching for the Fed to ease the accelerator, and he said the pace of tightening could be faster than the Fed has previously done.

“I think we should move early and quickly with tapering to ensure we are able to evaluate rates in 2022 if need be,” he said. “I’m not saying we would, but if we wanted to, we have to have some political leeway by the end of the year.”

The Fed is currently buying at least $ 120 billion in bonds every month, broken down into $ 80 billion in treasuries and $ 40 billion in mortgage-backed securities. While the Fed slashed its purchases by $ 10 billion a month during its last round of tapering, Waller sees a faster pace this time around, with the asset purchase program halting five or six months after the process began.

“You want to make it and get it over with,” he said.

While Fed officials mostly say they have more catching up to do on the employment side of their mandate, inflation is well above the central bank’s target of 2%.

Like his central bank counterparts, Waller said the most likely path for inflation to be a return to normal once the pandemic-specific effects wear off. However, he remains concerned about some of the things he sees.

“My concern is only anecdotal evidence I hear from business contacts who say they are able to pass prizes. They fully intend to do so. They have pricing power for the first time in a decade,” he said. “Those are the kinds of problems that worry you, that this may not be temporary.”

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