(Reuters) -The Federal Reserve should increase the pace of its reduction in bond purchases to give more leeway to raise interest rates from their near zero level sooner than it currently expects if high inflation and the strength of job gains persists, Fed Governor Christopher Waller said on Friday.
“The rapid improvement in the labor market and the deteriorating inflation data have pushed me towards favoring a faster pace of tapering and a more rapid removal of accommodation in 2022,” Waller said in prepared remarks delivered at the Center for Financial Stability in New York.
Fielding questions after the speech, he argued in favor of the Fed doubling the pace of the taper in January in order to be done by April and provide more policy space for an initial rate hike in the second quarter of next year.
The central bank began earlier this week to reduce its asset purchase program, through which it was buying $120 billion in bonds a month as part of emergency measures to help the economy through the pandemic.
It expects to taper those purchases to zero by June. Policymakers have indicated they will begin to raise interest rates only once that is completed.
But an inflation rate at a 30-year high and a quickening pace of job gains has given almost all Fed policymakers pause, with Waller and St. Louis Fed President James Bullard most vocal in pushing for an accelerated timeline.
The tension comes as President Joe Biden nears a decision on whether to keep Jerome Powell as Fed chair for another term, or to elevate Governor Lael Brainard to the position. A decision is expected by Thanksgiving.
PATIENCE NOT A VIRTUE
Waller gave short thrift to others on the rate-setting committee who continue to argue for patience given high inflation is expected to be transitory, even if it persists longer than thought.
“All shocks tend to be transitory and fade away; by this logic the Fed should never respond to any shocks, but sometimes it does, as it should… appropriate monetary policy responds to these inflation movements,” Waller said.
Bullard said earlier this week that he is in favor of speeding up the taper, ending purchases as of March.
Even those policymakers more sanguine up until now about the persistently high levels of inflation increasingly acknowledge an interest rate rise in 2022 is more likely than they previously said.
Waller acknowledged that he had also been caught off guard by the “large and persistent” effects supply constraints caused by the pandemic were having, with inflation pressures becoming more widespread and set to last longer into 2022 than he expected.
He added he was becoming increasingly concerned about inflation becoming embedded in wage demands, and referenced the recently signed contract by unionized John Deere workers as an example.
Their six-year contract included an initial 10% raise for all workers and 5% increases in 2023 and 2025, alongside other bonus benefits.
Waller repeated his view that the Fed’s balance sheet should eventually be reduced, arguing for a gradual and predictable roll-off of securities similar to last time.
Yields edged up off the day’s lows after Waller voiced support for reducing the Fed’s balance sheet outright, not merely ending the bond purchases adding to its growth.
The Fed next meets Dec. 14-15.
(Reporting by Lindsay Dunsmuir; Editing by Chizu Nomiyama)