Howard Schneider and Ann Saphir

(Reuters) – Federal Reserve policymakers made Friday a case that interest rates should be raised soon after March’s end of the central bank’s bond-buying program.

It wasn’t only the Fed’s inflation-focused Fed hawks that were involved in this. Mary Daly from San Francisco Fed, who as recently as one month ago called for patience by the central bank in its policy stance in order to allow more workers to enter the labor market again, stated that she supports two to three rate increases next year and would not rule out increasing borrowing costs in March when being asked about a date.

Daly told the Wall Street Journal that “I have changed my stance”, pointing out the financial burden rising prices might place on families. She also noted that many are not able to find work due to difficulties in hiring staff and health concerns.

In the interview, she stated, “If we attempt to push the labor markets now, when clearly many Americans who have been left behind don’t want in, then we end-up with a really steep pullback, historically a very sharp drawback on the Fed, it results into a recession.”

“If the economy produces high inflation even though it is unlikely that that will persist beyond the pandemic and the labor market appears extremely tight even though that is not our expectation, the appropriate policy action would be to increase the interest rate after we have tapered.”

These remarks by one Fed supporter of an employment-focused central bank monetary policy highlighted the extent of Fed policymakers’ shift over the past several weeks. Inflation measures have been running at nearly twice the Fed’s target rate of 2% while the unemployment rate has fallen to 4.2%. This is close to the Fed’s estimate of full employment.

Fed policymakers unanimously decided to accelerate the dismantling of the central bank’s bond-buying programme. The plan was to close asset purchases by March in order to give time for the interest rate rises most Fed policymakers think will be necessary next year.

In 2020, the central bank began its bond-buying program to protect the economy from economic collapse. It was purchasing $120 billion each month in Treasuries, mortgage-backed Securities and Treasuries until it stopped buying them.

Daly admitted to the WSJ, however that the economy can support more jobs when the pandemic subsides. However, she stated that they are close to the highest level of employment today.

“IN A GOOD POINT”

Christopher Waller (Federal Governor), who for many months has expressed concern about the rising cost of living, said to an economics group in New York that he supports tighter policy. A March rate rise would have been “very likely”, given the persistent inflation. He also said that he expected a return to prepandemic levels of unemployment by that point, after taking into account retirements.

Waller said that central banks should reduce their overall bond holdings in the next summer. A move like this could raise long-term borrowing prices and increase the need for policy tightening in order to slow down the economy.

A similar shift in policy would signal a more rapid return to normalcy than what happened after the 2008-2009 financial crisis. In 2007, the Fed had to wait a full year before raising interest rates. It then held its balance sheet stable for two additional years, reinvesting proceeds from maturing bonds.

Fed has approximately $8.8 trillion in its current balance sheet.

John Williams, New York Fed President, did not speak earlier in Friday to say he supported such a rapid withdrawal of policy stimulus. However, he said that the Fed’s decision quickly to close its asset purchase would allow the central bank to respond to new economic data.

CNBC’s he said that “it’s about getting our monetary policy in a positive position” and adding, “Of course, creating the option at some time next year to actually begin raising the federal fund target range.”

In March 2020, the Fed cut its overnight benchmark rate to a near-zero level and it has maintained that level since to support the economy’s recovery.