Senior Fed official says maybe time to start reduction debate
A senior Federal Reserve official called for a debate on reducing central bank asset purchases if the U.S. recovery continues to gain momentum, the latest sign that the Fed is preparing to reduce its support for the economy.
Randal Quarles, vice chairman of the Fed, said on Wednesday that he believed that even after “discounting temporary factors”, the rise in US inflation since December “would prove sufficient” to justify a reduction in purchasing of oil. ‘active later in 2021.
However, the job market is still lagging behind, he said in an address to the Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, a think tank.
“If my expectations for economic growth, employment and inflation over the next few months hold true. . . and especially if they arrive stronger than I expected. . . this will become important for the [Federal Open Market Committee] to start discussing our plans to adjust the pace of asset purchases in future meetings, ”Quarles said.
“In particular, we may need additional public communications on the conditions which constitute further substantial progress since December towards our broad and inclusive definition of maximum employment,” he added.
Quarles is not the only senior Fed official to hint at the central bank’s willingness to start considering reducing its monetary policy support if the economy continues to recover. This represents a change from the central bank’s position that any discussion of reducing asset purchases was premature.
“There will come a time in the next few meetings we will be at the point where we can start discussing reducing the pace of asset purchases,” said Richard Clarida, also vice president of the Fed, in an interview with Yahoo Finance. “It will depend on the data stream we get.”
San Francisco Fed President Mary Daly also confirmed that the central bank was starting to bring up the topic of tapering. “We’re talking about phase-out, and that’s what you expect from us,” she said in an interview with CNBC on Tuesday. “You want to be seen here for a long time.”
Quarles said the discussion of reducing the massive monetary stimulus put in place by the Fed during the pandemic was a matter of “risk management.”
“The best analysis we have right now is that the rise in inflation well above our target will be temporary. But those of us who are in the FOMC are economists and lawyers, not prophets and seers and revelators. We could be wrong, and what happens then? he said.
“Part of the math for balancing the risks of going over or under our 2% target is that the Fed has the tools to fight inflation that is too high, while it is more difficult to raise it. ‘inflation falling below target.’
In a question-and-answer session that followed, Quarles added, “If we had changed our monetary policy framework to 6% inflation, it would be different. We have some leeway to get it wrong here. “
The Fed’s preferred inflation indicator, Core PCE, currently sits at 1.8%, and as part of its new approach unveiled last August, it has pledged to maintain its ultra-accommodative policy until. ” to achieve a more inclusive recovery.
While stressing the importance of a Fed discussion on limiting asset purchases, Quarles said the central bank had to be “patient” with temporary price and wage increases, as long as expectations of inflation were “consistent” with its targets. Any discussion of raising interest rates at the Fed was “far into the future,” he added.