Fed hawks circle before Powell speech as they push for bond taper

2/2 © Reuters. FILE PHOTO: St. Louis Federal Reserve Bank President James Bullard speaks at a public lecture in Singapore October 8, 2018. REUTERS/Edgar Su/File Photo 2/2

By Howard Schneider and Lindsay (NYSE:LNN) Dunsmuir

WASHINGTON (Reuters) - The U.S. Federal Reserve's hawkish wing used the day before a marquee speech by Fed Chair Jerome Powell to urge the central bank to begin paring bond purchases they feel have become ineffective, it not downright harmful.

"We probably don't need the asset purchases at this point," St. Louis Federal Reserve president James Bullard said on CNBC on Thursday, repeating his call for the Fed to start trimming its $120 billion in monthly bond purchases soon and end the program by early next year.

Bullard, along with Kansas City Fed president Esther George and Dallas Fed president Robert Kaplan, also all downplayed the impact of the Delta variant in separate interviews, with George and Kaplan saying their business contacts were telling them the economic effects remained limited.

That represented an upgraded outlook from Kaplan, who last week had become more cautious about the potential harm to the economy from the highly contagious variant.

"By and large what we are hearing..is they are weathering this resurgence at least as well as previous surges, and many are telling us the impact on their business is more muted," Kaplan told CNBC.

Both Bullard and George indicated the central bank was making steady progress toward a plan to cut the bond purchases, which are aimed at keeping interest rates low to support the economy.

Bullard said the Fed was "coalescing" around a plan, and George told Fox Business that she expected there would be more information coming after the Fed's Sept. 21-22 meeting.

With strong inflation and expected continued job growth "there is an opportunity to begin to dial back on asset purchases," George said, with her preference being that the process start "sooner rather than later."

Kaplan too repeated his view that the Fed should announce a plan after its September meeting, with tapering to begin in October or "shortly thereafter" and finish about eight months later.

RISK OF HARM

Not beginning to reduce asset purchases soon risked harm to the economy, which is already grappling with growing imbalances, the policymakers said. All three cited the impact of high inflation on low- and moderate-income communities as they continue to argue that the Fed's goal of inclusive growth means both maximum employment and price stability.

Bullard also pointed to rising home prices as a concern. "You don't want to be too complacent," he said. "There is some worry that we are doing more damage than helping," by continuing to buy mortgage-backed securities that hold down borrowing costs and arguably support even higher asset values.

Their comments precede remarks by Powell on Friday that will provide an update on the economy, and likely touch on how the Fed views the competing risks of higher inflation against the possibility that a new surge of virus cases slows the U.S. economic recovery in a meaningful way.

Fed officials at their July meeting agreed it would likely be time to taper the bond purchases by later this year, and most analysts feel there is little difference to the economy if that process starts in any given month.

But the announcement of a plan will send a strong signal that the Fed feels the risks from the pandemic have receded enough to start reducing the extraordinary support rolled out in March 2020 to stave off a collapse.

It's a bit of communications the Fed wants to get right, and some have argued that is cause for a bit more patience.