By Howard Schneider

WASHINGTON (Reuters) – The U.S. job market has already met the Fed’s benchmark test to reduce it monthly bond purchases, Kansas City Fed President Esther George said, and the central bank should now turn to discussion of how its massive bondholdings may complicate its eventual decision about when to raise interest rates.

George spoke to the American Enterprise Institute, stating that there was no reason to continue adding to our assets each month.

Although the pandemic continues to be a concern, and labor and goods markets continue to face supply restrictions and bottlenecks as a result, George said that these problems will recede over time, and normal consumption patterns, work, and hiring will reemerge.

Now, the Fed has to figure out how its massive $8.5 trillion balance sheet of securities will affect a forthcoming discussion on interest rate.

She stated that these asset holdings would not disappear even if monthly purchases drop to zero. They “depress long-term rates most relevant to households and businesses… This accommodation won’t end even when tapering has been completed.”

For the Fed to raise its short-term policy rate, it must ensure that inflation remains at or near the central bank’s target of 2% and maximum employment is achieved — criteria already difficult to assess because of the pandemic.

Another set of considerations will need to be made regarding the effects of the large balance sheets.

What part of the yield curve are we most comfortable with? George speculated that while the Fed could keep long-term rates low, it might also want to counter stimulus by raising its short-term policy interest rate. George stated that this might lead to the Fed shifting away from assets with shorter maturities and lower neutral policy rates.

George explained that as the economy recovers after this pandemic, it is likely that its path will confound our expectations about what a normal return might look like. This is also true of the normalization and normalization in monetary policy. Both points point to a difficult and long process.