The Fed’s Thoughts on Tapering

Last week KC Fed President Esther George spoke and said the Fed should start tapering of bonds this year. St. Louis Fed President James Bullard said inflation is above their target level and he is skeptical that inflation is transitory. He thinks inflation will be 2.50% or higher next year. Finally, he wants to get started tapering and having it finished by March 31st. He also wants the Fed to quit reinvesting their proceeds from loans being paid off next year. This much “tapering” could really negatively impact mortgage rates next year.

Federal Reserve Chairman Powell spoke last Friday and he said that tapering should start by end of the year. If the August Jobs Report is really strong this Friday I bet the Fed will announce the beginning of tapering to be coming soon at their next meeting on September 23rd. If not then, their next meeting is November 3rd.

Further Powell said the Fed has different more stringent tests for short-term rate hikes. He said that “substantial further progress” has been met on inflation, but he still believes that inflation is transitory. Finally, he said clear progress has been toward maximum employment.

These “dovish” comments were good for bonds last Friday, which is rare as typically when he speaks he scares bond investors instead.