Fed Likely to Start Tapering Bond Buys in December: Former Atlanta Federal Reserve Chief

The Federal Reserve Board Building on Constitution Avenue in Washington on March 27, 2019. Brendan McDermid/Reuters

A former Federal Reserve official said the central bank is likely to announce a tapering to its massive asset-buying program at a policy meeting in November and begin the process a month later, as investors look for clues when the central bank will begin withdrawing some of the support that has boosted markets.

Dennis Lockhart, who served as president of the Atlanta Federal Reserve from 2007 to 2017, made the prediction during a question and answer session at the Reuters Global Markets Forum (pdf) on Sept. 2.

“I think at the September meeting, they could disclose a bit more, but I doubt the final decision will be announced at the September meeting. I put a bit more probability on an announcement coming out of the November meeting, with the start of the actual tapering maybe a month or so later,” Lockhart said.

His remarks come as investors eagerly await signs of when the Fed will initiate the much-anticipated rollback of its massive $120 billion in monthly purchases of Treasury and mortgage securities, one of the crisis support measures the central bank deployed last year to help lift the economy from the pandemic recession.

The Fed’s bond-buying program, along with dropping the benchmark interest rate to near zero, have led to a sharp expansion of the money supply, boosting the economic recovery, buoying markets, and contributing to inflationary pressures.

Federal Reserve Chair Jerome Powell last week acknowledged a “sharp run-up in inflation,” though pointed to signs that upward price pressures were moderating. Speaking at the Fed’s annual economic symposium in Jackson Hole, Wyoming, Powell struck a largely dovish tone, saying the central bank would continue buying bonds at the current pace until “we see substantial further progress” toward the Fed’s dual goals of price stability and maximum employment.

Powell noted that the “substantial further progress” test had been met for inflation and that there had been “clear progress” toward the maximum employment objective, but struck a cautionary tone around labor market recovery in the face of the spread of the Delta variant of the CCP (Chinese Communist Party) virus.

“The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the Delta variant. We will be carefully assessing incoming data and the evolving risks. Even after our asset purchases end, our elevated holdings of longer-term securities will continue to support accommodative financial conditions,” Powell said.

Powell said that if further signs confirm the strength of the labor market recovery, this could make it “appropriate to start reducing the pace of asset purchases this year,” with some analysts predicting a possible announcement at the Fed’s next policy meeting over Sept. 21–22.

Lockhart believes that announcement won’t come until the Federal Open Market Committee (FOMC), the Fed’s policy-setting body, meets in November. He suggested this would give policymakers a longer window in which to weigh labor market data to determine if sufficient progress has been made towards the goal of maximum employment, setting the stage for a tightening of monetary conditions.

Looming large in this context is Friday’s jobs report, the so-called non-farm payrolls (NFP) release from the Labor Department, which is closely watched by investors and Fed policymakers alike. The previous non-farm payrolls report showed America’s private employers added 943,000 jobs in July, topping the 850,000 jobs created in June. A weak print on Friday would weaken the case that enough progress has been made in the labor market recovery, potentially drawing out the timeline for a decision on tapering.

Consensus forecasts predict Friday’s non-farm payrolls number will come in at 750,000.

“I have no reason to believe that the employment situation will reverse, and the job gains will fall off a cliff,” Lockhart said, commenting on his expectations for the NFP release. “I expect a number that is north of 600,000, and conceivably in the 800,000 range, which is the average we’ve seen for the last three months. Having said that, the downside risk to the outlook is the Delta variant and how it plays out.”

Lockhart said the FOMC will be assessing signals to determine whether to delay the start of tapering, adding, “if we have a particularly bad next two months, it wouldn’t totally surprise me that they delayed the tapering decision. But as of now, it does not look like the base case.”

Ahead of the non-farm payrolls release on Friday, Dow and S&P 500 futures were up, Dow futures were down, the yield on the benchmark 10-year Treasury note rose, while the dollar held near monthly lows.

Reuters contributed to this report.