By Ann Saphir
(Reuters) – Federal Reserve Governor Michelle Bowman said Wednesday that she was “very happy” to begin withdrawing some crisis-era U.S. support for the economy by next month. She cited concerns over inflation and asset bubbles.
As part of COVID-19, the Fed bought Treasuries from mortgage-backed Securities and Treasuries. It is believed to have prevented a financial crises by lowering borrowing costs, encouraging investment, and encouraging hiring once the economy has reopened.
Bowman addressed South Dakota State University, stating that “I am aware that the benefits of our asset purchases to the economy are likely to outweigh the possible costs.” As long as the economy improves as I anticipate, I’m comfortable with the decision to reduce our asset purchases by the end of this year, and preferably as soon as possible at our November meeting.
With millions still unemployed, last December saw the Fed promise to continue buying $120 Billion of bonds every month, until full employment is achieved and inflation reaches 2%.
Fed Chair Jerome Powell announced last month the close of this program. The inflation rate, which was well over 2% for several months, had passed the “substantial Further Progress” test. He stated that only one “decent job report” away from the goal of achieving the standard in terms of employment.
Fed policymakers were secretly more concerned about inflation and began to plan for reducing support for the economy.
The Labor Department announced last week that the economy added 194,000 jobs in September. This was well below analyst expectations, but it is widely believed to be enough to meet Powell’s “decent” hurdle.
Bowman stated Wednesday that she is seeing progress in jobs, but not a return to pre-pandemic employment levels anytime soon. She said that even though businesses are offering higher salaries and sign bonuses, it is still difficult to recruit employees.
The pandemic has seen millions of people, both older and younger, leave the labour force. This is a problem that the Fed’s monetary policies cannot address.
Inflation could be pushed up by rising wages, which can cause supply-chain bottlenecks to increase, she explained. These pressures may last for longer than originally expected. She said that rising house prices have been a problem for lower income households. Bankers are now concerned about possible house-price bubbles.
Bowman indicated that the Fed’s asset purchases had “essentially served their purpose”, and that they are now subject to serious risk. “In particular I’m concerned about the fact that the Fed could be contributing towards valuation pressures, particularly in the housing and equity markets,” Bowman stated. He also said that the Fed’s current loose monetary policy may “pose risk to the stability longer-term inflation forecasts.”
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