MNI: Fed's Waller-- More Than Taper May Be Needed in 2022

The Federal Reserve needs to finish tapering QE by the middle of next year, giving policy makers room to hike rates soon afterwards if needed to deal with stronger-than-expected inflation, Governor Christopher Waller said Tuesday.

"I do not expect liftoff to occur soon after tapering is completed," he said in prepared remarks to a Stanford University conference. "The two policy actions are distinct."

"The pace of continued improvement in the labor market will be gradual, and I expect inflation will moderate, which means liftoff is still some time off," he said.

Waller also flagged higher inflation from supply-side bottlenecks that are lasting longer than foreseen. "If my upside risk for inflation comes to pass, with inflation considerably above 2% well into 2022, then I will favor liftoff sooner than I now anticipate," he said.

The Fed should begin tapering at its November meeting and complete the reduction in buying by the middle of 2022, he said, adding the central bank should remain flexible.

HEALTHY JOB GAINS SEEN

"If economic conditions and the outlook were to deteriorate significantly, we could slow or pause this tapering. And if the economy were to strengthen more than expected, the plan to rapidly end purchases would provide policy space in 2022 to act sooner than now anticipated to begin raising the target range for the federal funds rate."

Waller said he's watching measures of inflation expectations closely for signs that recent high readings are starting to permeate broader sentiment.

"Bottlenecks have been worse and are lasting longer than I and most forecasters expected, and an important question that no one knows the answer to is how long these supply problems will persist," he said.

He downplayed a slowdown in hiring over the last two months, saying he expects that was a temporary hit from the Delta variant that will fade as the year draws to a close.

"We may be in for very healthy job gains in the last quarter of this year," Waller said. Still, some 2 million jobs lost during the pandemic due to early retirements are unlikely to come back, he added.