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A senior official at the Federal Reserve signalled the US economy is strong enough for the central bank to begin reducing its massive bond-buying programme, but urged a “patient” approach to raising interest rates.
John Williams, president of the New York Fed, acknowledged the improving economic outlook and set the stage for the Fed to scale back its $120bn-a-month asset purchase programme this year.
But he stressed that the conditions necessary for the Fed to eventually adjust its main policy rate were a long way off from being met.
“The headline of our economic story is good news: the recovery continues to show solid momentum. But the subheading is that we’ll need to be patient,” he said at an event hosted by the Economic Club of New York on Monday. “Even with the strong pace of growth we experienced much of this year, a full recovery from the pandemic will take time to complete.”
Williams, who sees the economy expanding between 5.5 to 6 per cent this year, said a move to reduce the central bank’s asset purchase programme may “soon be warranted”, echoing the message sent by Fed chair Jay Powell last week.
Powell last week teed up an announcement on the tapering process at the next policy meeting in November and signalled widespread support among central bank officials for the stimulus programme to be wound down entirely by mid-2022.
The Fed had said it would continue buying Treasuries and agency mortgage-backed securities at the monthly pace until it saw “substantial further progress” towards inflation that averages 2 per cent and maximum employment.
The taper timeline came alongside revised individual projections about interest rates, which showed an increasing number of Fed officials now pencilling in a rate rise in 2022. That left the 18-person Federal Open Market Committee evenly divided on a move next year, with at least three increases expected by the end of 2023.
Chicago Fed president Charles Evans told reporters on Monday that he supports lift-off in 2023 and a “gentle incline” in interest rates from there.
Powell reiterated last week that the thresholds for the Fed to lift interest rates from current near-zero levels are much more stringent than those for dialling down the asset purchase programme.
Williams on Monday said the labour market still has a “long way to go” before fulfilling the Fed’s maximum employment goal. While the unemployment rate has dropped to 5.2 per cent, there are still more than 5.3m fewer jobs than there were prior to the pandemic.
Williams also said that the burst of inflationary pressures, which have pushed US consumer price growth to a 13-year high, are likely to fade over time as supply chain bottlenecks ease.
As pandemic-related disruptions ease, he said he expects inflation to retrace to around 2 per cent next year. Core personal consumption expenditure index, the Fed’s preferred gauge, sits at 3.6 per cent.
“It is important to remember that even after the asset purchases end, the stance of monetary policy will continue to support a strong and full economic recovery and sustained attainment of 2 per cent average inflation,” he said.