U.S. Fed moves closer to tapering asset purchases despite Delta variant uncertainty

The U.S. Federal Reserve is moving closer to announce a plan to taper its asset purchases later this year despite the uncertainty caused by the Delta variant, Fed officials and economists have said.

"Looking ahead, most participants 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," the Fed said Wednesday in the minutes of its July 27-28 meeting.

Various Fed officials thought that economic and financial conditions would likely warrant a reduction in asset purchases in the coming months, the minutes said.

The Fed has pledged to keep its benchmark interest rate unchanged at the record-low level of near zero, while continuing its asset purchase program at least at the current pace of 120 billion U.S. dollars per month until "substantial further progress" has been made on employment and inflation.

"There are two main arguments for tapering. The first is that with such strong budget support and with the economy showing signs of continuing its strong recovery, the economy no longer needs the same strong monetary policy support as it did earlier," Desmond Lachman, resident fellow at the American Enterprise Institute and a former official at the International Monetary Fund, told Xinhua.

"The second reason is that we are seeing unhealthy signs of excessive asset price inflation in the housing and equity markets that could cause financial instability down the road," Lachman said, expecting the Fed to begin tapering by the end of the year.

Several Fed officials, including Dallas Federal Reserve Bank President Robert Kaplan and Boston Federal Reserve Bank President Eric Rosengren, have called for the central bank to announce a plan for tapering asset purchases as soon as September and end the purchases by the middle of next year.

In an interview with the Financial Times earlier this week, Rosengren noted that the cost-benefit analysis around the Fed's asset purchase program changes a bit as a result of the pandemic creating these supply constraints.

"We're having more of an impact on temporary surges of prices and less of an impact on trying to get back to full employment and a more sustainable inflation rate," Rosengren said, adding the rising debt loads fueled in part by the asset purchases could eventually jeopardise economic recovery.

U.S. inflation remained elevated in July due to pandemic-related supply constraints. The consumer price index increased 5.4 percent over the past 12 months through July, the same increase as the period ending June and the largest 12-month increase since 2008, according to the Labor Department.

"There are two reasons to think that inflation might have peaked. The first is that supply bottlenecks might ease. The second is that the economy might now slow as a result of a delta wave in the pandemic," Lachman said.

Lachman expected that U.S. inflation rate would slow to 4 percent by year-end and to 3 percent by the end of 2022, still well above the central bank's target of 2 percent.

Meanwhile, the spread of the more contagious Delta variant has also rekindled concerns about the labor market recovery.

"Consumers may pull back from some in-person services amid the spread of the more contagious strain and some may be reluctant to return to work, further delaying the labor market recovery," the Economics Group of Wells Fargo Securities led by chief economist Jay Bryson said Friday in a report.

"Overall, the increased uncertainty surrounding the Delta variant supports our view that the Fed will wait to see how the labor market evolves from here prior to removing accommodation," the report said.

Fed Chairman Jerome Powell is expected to give a speech virtually on Aug. 27 during the annual Jackson Hole economic policy symposium, which may offer further clues on the Fed's taper plan.

At a press conference in July, Powell seemed less concerned about economic effects from the spread of the Delta variant. "What we've seen is with successive waves of COVID-19 over the past year and some months now, there has tended to be less economic implications from each wave," he said.

The Wells Fargo Economics Group continues to expect that the Fed will officially announce tapering near the end of this year and kick off the actual tapering of purchases at the start of next year.

A survey released by Bloomberg last month showed that most economists expected a formal announcement of tapering by the Fed in December and actual reductions starting in the first quarter of 2022.