Top Fed official opens door to faster ‘taper’ of bond-buying programme

The vice-chair of the US Federal Reserve on Friday opened the door to a faster withdrawal of its massive bond-buying programme, suggesting the central bank could take earlier-than-expected action to tame inflation.

Richard Clarida said the Federal Open Market Committee could consider discussing the pace of the planned “taper” at its upcoming policy meeting in December.

Earlier this month, the Fed began winding down its $120bn-a-month purchases of Treasuries and agency mortgage-backed securities, and said it intended to reduce them by $15bn each month. That puts it on track to remove the stimulus entirely by the middle of next year.

At the time, the Fed said that it was “prepared to adjust the pace” of the tapering process “if warranted by changes in the economic outlook”.

On Friday, Clarida reiterated his view that he sees “upside risk” to inflation and expects “very strong” growth in the fourth quarter of 2021.

“I’ll be looking closely at the data that we get between now and the December meeting, and it may well be appropriate at that meeting to have a discussion about increasing the pace at which we’re reducing our balance sheet,” he said at an event hosted by the San Francisco Fed.

An earlier end to the asset purchase programme could pave the way for earlier interest rate increases given that Jay Powell, the Fed chair, has said the central bank would probably avoid adjusting its policy rate while it is still buying government bonds.

The price of shorter-dated government debt has hung on policymakers’ every word and Clarida’s comments sent reverberations through the $22tn Treasury bond market.

The yield on the two-year note, which is the most responsive to Fed policy shifts, jumped 0.05 percentage points from a low hit earlier in the trading session when Treasuries had been rallying. Yields rise when a bond’s price declines.

Implied rates on federal funds futures also rose following the comments from Clarida, with traders pricing in a full quarter point interest rate increase by the Federal Reserve by July.