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U.S. economy “close” to meeting bond taper threshold By Reuters


© Reuters. FILE PHOTO: Charles Evans, Chicago Federal Reserve Bank, looks on at the Global Interdependence Center Member Delegation Event, Mexico City (Mexico), February 27, 2020. REUTERS/Edgard Garrido/File Photo

By Lindsay (NYSE:) Dunsmuir

(Reuters) – The U.S. economy is close to having met the Federal Reserve’s bar for beginning to reduce its bond purchase program and will meet it soon if job gains continue, Chicago Fed President Charles Evans said on Monday, the latest policymaker to back the central bank’s step away from pandemic-era crisis policies.

Evans made prepared remarks in Virginia to the National Association for Business Economics Annual Conference. If the employment gains continue, then it is likely that these conditions will soon be fulfilled and tapering can begin.

Evans stated previously that he anticipated a reduction in Fed’s monthly asset purchases of $120 million this year. This is a measure to reduce longer-term interest rate risk.

The Fed Chair Jerome Powell indicated last Wednesday that tapering will be initiated by the Fed as early as November. This was after Powell stated following the Fed’s most recent policy meeting in which they kept interest rates close to zero, the Fed had only released one monthly report showing the economy fell below the threshold. October 8th is the date for publication of the next report.

Two Fed officials have stated since then that Loretta Mester, Cleveland Bank President, and Esther George (Kansas City Fed President) believe the economy is in a good enough state to allow the central bank’s extraordinary support to be withheld.

Evans is firm in his belief that current high inflation, which is not as expected, does not warrant an abrupt increase in interest rates until tapering has finished.

Evans stated that he was more concerned about the fact that there is not enough inflation by 2023 or 2024, than that the supply-side issues that caused an increase in inflation over the past year will disappear.

Evans is a strong advocate for keeping the central bank’s promise to reach maximum employment. He also asked fellow policymakers not to change their current framework regarding inflation.

Evans explained that to keep long-term inflation expectations stable at 2 per cent, “we must be prepared to allow inflation to rise reasonably high during an expansionary phase to compensate for any underruns which almost inevitably happen” in a recession.

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