By Ann Saphir

(Reuters) – While most U.S. central banks agree that they will soon reduce their support for economic growth, they are split on how high a risk inflation is and what they should do to address it.

Some indication of the intensity of that debate should emerge on Wednesday when the Federal Reserve releases the minutes of its Sept. 21-22 policy meeting, at which officials sent their clearest signal https://www.reuters.com/business/finance/fed-likely-open-bond-buying-taper-door-hedge-outlook-2021-09-22 yet that the days of crisis-era policy were numbered.

The economy is expected to expand at its fastest rate in many decades. Inflation has risen well beyond the Fed’s comfort zone. With the labor market recovering from the devastating effects of the coronavirus pandemic and most policymakers believing it prudent to reduce the $120 billion monthly asset purchases that the central bank makes to stimulate the recovery, the majority believe it wise to cut back on these annual asset purchases.

Jerome Powell, Fed chair, said that the Fed would begin selling Treasuries to the mortgage-backed Securities next month. This will be followed by a complete winding down in the middle of next fiscal year.

After a government report on Friday showing U.S. employers added 194,000 jobs last month https://www.reuters.com/world/us/us-job-growth-slows-sharply-september-unemployment-rate-falls-48-2021-10-08, well below many economists’ expectations, Fed Vice Chair Richard Clarida on Tuesday said the employment guidepost was “all but met,” though he did not point specifically to November for the start of the tapering of the asset purchases.

He repeated Powell’s forecast for the timing https://www.reuters.com/world/us/feds-clarida-employment-test-begin-bond-taper-all-met-2021-10-12 of the end of the “taper,” and the readout of September’s policy meeting will likely cement that view. Minutes of the Fed’s September policy meeting will be released at 2 pm EDT (1800 GMT).

As Patrick Harper, Philadelphia Fed President, has said it: “The taper is expected to be consistent and boring.”

Any suggestion that policymakers will speed up or slowdown the taper, based on economic recovery pace, is a departure form the Fed’s 2014 pattern of tapering bond purchases. Markets were surprised by this change.

Perhaps, it is more likely that minutes will provide new information about policymakers’ inflation outlooks and, particularly, whether they feel they have to compromise their goal to reach full employment to stop inflation spiraling upward.

Karen Dynan from Harvard University said that “I don’t believe most central bank officials think they are faced with this tradeoff right now” because she believes inflation will ease. “If we are able to reach next year with… high inflation, then the decision will matter.”

The Fed released economic projections last month alongside its policy statement. They showed that inflation will rise to 4.2% in 2019, more than twice the flexible target of 2%. New inflation data will be released by the U.S. government early Wednesday.

Unpleasant Situation

Powell and Clarida seem to be denying that this possibility exists. Although Fed policymakers may be divided on whether interest rate increases will occur next year or 2023, Clarida stated Tuesday that their projections were “entirely consistent with” the Fed’s policy framework, which aims to achieve maximum employment and stabilize inflation.

Public comments by policymakers such as the Fed’s two longest-serving regional Fed chiefs indicate that there is active dialogue below the surface.

James Bullard, President of the St. Louis Fed, is concerned that current high inflation may persist and become embedded in the economy. This would require a more aggressive response by the central bank. Bullard is concerned that inflation may rise or stay at the same level. He asks for the Fed’s immediate end to its tapering of asset purchases so it can increase rates this spring and summer, if necessary.

Charles Evans, Chicago Fed President expects inflation inflation to ease off its own when businesses get rid of supply problems that have been causing price rises. Evans advises his fellow colleagues to “be patient”. He says rates will not need to begin rising before the latter part of 2023.

Clarida for his part stated on Tuesday that there is little evidence of rising wages contributing to an unhealthy rise inflation but that it was “the great unknown” how long this price-inflating supply chain will continue. His current rate-hike forecast was not provided by Clarida.

It matters how policymakers differ on the timing of Fed rate increases. This is not only important for those who invest and follow the markets, but also to Americans generally, especially the millions of people who worked before the pandemic.

Fed policymakers who feel the need to increase rates in order to stop inflation could halt the recovery.

To make sure that the labor market is more healthy, the rate rises could be delayed. However, if they misunderstand the persistence of inflation they may have to increase rates to counter it.

Tim Duy from the University of Oregon is an economist professor. The situation has been described as “unpleasant,” and made worse by uncertainty regarding who will take over the Fed’s chair after Powell retires in February 2022. The U.S. President Joe Biden is yet to announce if Powell will be reappointed or a new leader of the central bank.