The Federal Reserve will be "very careful" in communicating any future plans to gradually reduce its massive bond-buying program, mindful that markets have a "real sensitivity" to the issue, Fed Chairman Jerome Powell said Jan. 14.
The Fed chief's comments come as a debate brews among Fed officials over whether a reduction of their $120-billion-per-month program may be in store later this year.
A few regional Fed officials have taken on a more optimistic tone as COVID-19 vaccines begin to roll out, seeing the possibility of a rapid rebound later in 2021 that reduces the need for Fed support. Other Fed officials have cast doubt on that timeline, saying the current pace of purchases may be necessary for some time to help keep long-term interest rates low even as the economy improves.
Investors were looking to Powell's appearance for more clarity on the Fed's plans, which the Fed chair emphasized will be communicated "well in advance" of any actual tapering.
"Now is not the time to be talking about an exit," Powell said, recalling the "taper tantrum" in bond markets in 2013 that drove borrowing costs up as markets feared the Fed was pulling back on its bond purchases prematurely.
The Fed will begin discussing the specific timing of tapering when it has "clear evidence" that it is making progress toward its goals of maximum employment and stable prices. Right now, the economy is "far from our goals," he added.
"When that happens and we can see that clearly, we'll let the world know," Powell said at a Princeton University Bendheim Center for Finance event. "We will communicate very clearly to the public, and we'll do so, by the way, well in advance of active consideration of beginning a gradual taper of asset purchases."
The central bank has been buying $80 billion in Treasurys and $40 billion in mortgage-backed securities each month, and it has signaled it will continue that pace until it makes "substantial further progress" on its goals of maximum employment and stable prices.
Fed officials have noted that the U.S. still faces a shortfall of nearly 10 million jobs compared to February 2020. Inflation has also taken a significant hit, with the core personal consumption expenditures price index rising by 1.4% year over year in November. Under their new policy framework, Fed officials are aiming for a moderate temporary overshoot of their 2% inflation goal and a "broad-based and inclusive" labor market recovery.
A few regional Fed officials have floated the possibility that the Fed could begin to taper its purchase levels later in 2021, assuming COVID-19 vaccines are widely distributed and the U.S. economy sees a boom of pent-up demand from consumers.
Atlanta Fed President Raphael Bostic kicked off the year by telling Reuters he hopes the Fed can "start to recalibrate" the program later this year if the economy bounces back quickly.
Others who have expressed an openness to a late 2021 taper include Dallas Fed President Robert Kaplan. He said Jan. 11 he does not want to pull back support while "we're in the teeth of the pandemic," but that a strong rebound later in the year could prompt a discussion about when the Fed will "gradually wean off this support."
"I don't know if the year is going to unfold that way, but … if we actually realize that later this year, my own view is we should at least be having an earnest discussion about when it's appropriate to taper," Kaplan said at a town hall event.
But other Fed officials have shown no rush to reduce the purchases this year, with Fed Vice Chairman Richard Clarida saying recently that his own outlook currently suggests the program should stay as-is for the remainder of the year.
Fed Governor Lael Brainard also said in a Jan. 13 speech that the current pace of purchases will likely "remain appropriate for quite some time."
"The economy is far away from our goals in terms of both employment and inflation, and even under an optimistic outlook, it will take time to achieve substantial further progress," she said. However, Brainard added that the outlook is "highly uncertain and forecasts are subject to revisions — a key reason why our forward guidance is outcome based and tied to realized progress on our goals."
Private-sector economists seem split on whether the Fed will taper the QE program this year. The American Bankers Association's Economic Advisory Committee, a panel of economists at several banks, projected the Fed would start the taper process in the fourth quarter of 2021.
But the panel did not have "strong agreement" on that point and some see the Fed holding off until 2022, the committee's chair, Beata Caranci, told reporters on Jan. 14. Caranci is senior vice president and chief economist at TD Bank Group.
The uncertainty over the bond program's future raises the possibility of a "knee-jerk reaction" from bond markets over worries of a premature pullback, similar to the "taper tantrum" in 2013 that caused a sharp increase in Treasury yields, Caranci added.
"We could see a sharper backup in yields, albeit temporary," Caranci said.
Powell acknowledged those risks at the Princeton University event, saying Fed officials have learned to be careful about exiting "too early" and to "try not to talk about exit all the time" so that markets do not get a wrong signal.
"We know we need to be very careful in communicating about asset purchases," Powell said.