MNI: Fed’s Bowman Considered Waiting Longer To Taper QT

Federal Reserve Governor Michelle Bowman said Tuesday she was one of the few officials who thought it might be appropriate to wait longer before tapering QT or taper more gradually.

“I would have supported either waiting to slow the pace of balance sheet runoff to a later point in time or implementing a more tapered slowing in the pace of runoff,” she said in a wide-ranging speech about the balance sheet delivered at the Bank of Japan. Minutes from the Fed's May meeting indicated a "few" FOMC members felt that way.

Bowman said policymakers will need to communicate clearly as they approach the end of QT to make clear that such a threshold does not mean rate cuts are forthcoming.

“It will be important to communicate that any future changes to balance sheet runoff do not reflect a change in the FOMC’s monetary policy stance. Not effectively communicating this point might cause the public to interpret the endpoint of QT as a signal that the FOMC would decrease the target range for the federal funds rate, thereby causing financial conditions to inappropriately ease,” Bowman said.

Looking back, Bowman said the Fed likely persisted with bond purchases for too long during the pandemic given the size of the fiscal response.

“My own view is that the FOMC would likely have benefited from an earlier discussion and decision to begin tapering and subsequently end asset purchases in 2021 given the signs of emerging inflationary pressures,” she said. (See MNI INTERVIEW: Kaplan Says Loose Fiscal Holding Up Fed Cut)

“Doing so would have allowed the FOMC the option to have begun to tighten monetary policy earlier by raising the target range for the federal funds rate. While a robust and rapid response by the FOMC was appropriate in 2020, I think it is worth asking whether such a robust response for so long was appropriate.”