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FOMC creates option for March hike with talk of accelerating taper of asset purchases.
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Faster tapering of asset purchases next month is all but a done deal, leaving the Federal Reserve with an option to lift interest rates from near zero as soon as March to calm frothy inflation, former officials said in interviews.
Consumer prices and the job market have strengthened further in the weeks since the Fed announced a plan to begin shrinking its USD120 billion a month of QE. That has prompted a rash of hints from top officials the FOMC will quicken its monthly taper pace from the current USD15 billion later this month. The change would likely take effect starting mid-January, the former officials said.
"If they double the pace starting mid-January, they will be finished mid-March. That means that they could, in principle, tighten as early as the March FOMC meeting. Not that they would necessarily lift-off then, just that they would have created the option of doing so. This seems like the most likely way they will go given Chairman Powell’s comments," former New York Fed President Bill Dudley told MNI.
To continue adding stimulus as inflation surges is a "startling stance for monetary policy," said former Richmond Fed President Jeff Lacker. Quickening the taper signals a shift of focus to when to initiate rate increases, he said.
Some FOMC participants had argued against more rapid tapering as a means of holding off the first rate increase, but inflation surprised everyone last month by topping market expectations and a setting a three-decade record.
LIVE BUT UNCOMFORTABLE
The main rationale for the glacial approach to the initiation of tapering was the risk of a tantrum, but "that risk was always overblown, in my view," Lacker added. "The fact that the initiation of the tapering went without a hiccup means that there is little risk of adverse market blowback from speeding up the pace."
Winding up asset purchases by March would give the Fed an opportunity to hike rates at that time, or leave officials plenty of room to telegraph liftoff by the May or June meetings, said Ellen Meade, former special adviser to Fed Vice Chair Richard Clarida. That could be the first of two or more rate hikes next year.
"March is live but it's uncomfortable," said Meade, who departed the Fed Board in August. "They would be positioned to do it but it seems like they do want to see data for the first couple months of the year."
A second option for the Fed, aside from doubling its taper pace, is to speed up less aggressively and end purchases in April, Roberto Perli, a former Fed official now at Cornerstone Macro, told MNI.
"The latter would probably be less risky from a Treasury market perspective, while the former would send a stronger signal that we are out of the woods, so to speak."