Fed officials: Faster bond taper could keep options open on rate hike

WASHINGTON (Reuters) -Two regional Federal Reserve officials said Monday that a faster withdrawal from the central bank’s bond purchase program could give it more leeway in deciding when to raise interest rates.

The discussion of how fast to end the Fed’s $120 billion monthly bond purchase program is only just beginning, but should keep in mind how it affects the debate that will follow it over interest rates.

“Creating optionality for the committee will be really useful and that will be part of the taper debate as we think about how much signaling we are doing about future rate policy,” St. Louis Fed president James Bullard said.

Dallas Federal Reserve president Robert Kaplan noted the central bank’s new strategic framework does not mention bond purchases, and “moderating that sooner than later” might give the Fed more flexibility over the rate discussion.

The tilt by Fed policymakers to a faster expected start to interest rate increases caught markets by surprise last week. Kaplan said it was a reaction to an economic outlook that took a sharp turn between December and June.

As of December the path of the coronavirus pandemic remained uncertain, but “when we got to March it was clearer that we were going to get the pandemic under control…By the time we get to June…you’ve really got a big upgrade” that made the core of officials expect rate increases in 2023 instead of 2024, said Kaplan. “What you are seeing…is monetary policymakers simply reacting to the dramatically improved economic outlook.”

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