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Fed officials say they see a pullback in stimulus even with inflation cooling


At least three Federal Reserve officials said Monday they are ready to pull back on stimulus even though they don’t see a threat from inflation.

Speaking at separate engagements, Fed Governor Lael Brainard and regional presidents John Williams of New York and Charles Evans of Chicago all expressed comfort with the first phase of policy tightening – a gradual pullback on the monthly bond-buying that has provided support for markets and the economy.

It’s evident that significant progress has been made in achieving the inflation target. Williams stated that there has been good progress towards maximum employment. If the economy improves as expected, then a moderated pace in asset purchases might be justified.

They stressed, however, that the move, known as tapering, isn’t providing any signal about looming interest rate hikes.

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Brainard stated to the National Association for Business Economics that the forward guidance regarding maximum employment and average inflation set a higher standard for raising the policy rate than slowing asset purchases. I would like to emphasize that any announcement of a slowing in asset purchases should not be taken as a signal regarding the timing of liftingoff.

These positions are consistent with the Federal Open Market Committee’s statement last week. Officials agreed that “tapering may soon be warranted,” with Chairman Jerome Powell saying after the meeting that he’d like to bring the minimum $120 billion a month bond-buying program to a close by mid-2022.

That move toward tightening comes even though the committee does not expect the current inflationary pressures, which are running at the highest rate in decades, to persist.

Evans said that the Fed needs to go higher on the inflation goal than its traditional target of 2%. Instead of aiming for inflation at 2%, Evans stated it should be “above” that goal.

He also spoke before the National Association for Business Economics Monday, saying that he believes the FOMC’s actions and communications play an important part in curbing long-term inflation expectations. Taken together, it is more concerning that we don’t generate enough inflation by 2023 or 2024 than the possibility of us living with too much.

Williams stated that he expected inflation to remain above 2% “another year” due to “pandemic-related swings of supply and demand gradually receding.” He said that inflation would fall below the target by the end of the year.

In their quarterly economic outlook, FOMC members say they see core inflation, which excludes food and energy prices, running at 3.7% this year before falling to 2.3% in 2022 and 2.2% and 2.1% respectively in the following two years. Officials also penciled in possibly one interest rate hike in 2022, followed by three apiece in the 2023 and 2024.

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