“I support starting to dial back our purchases in November and concluding them over the first half of next year,” Federal Reserve Bank of Cleveland President Loretta Mester said. Separately, Kansas City President Esther George said “the criteria for substantial further progress have been met,” referring to the central bank’s taper test.
Mester and George, both among the more hawkish Fed officials, expressed support for the Federal Open Market Committee’s decision this week to say a reduction in purchases may be warranted soon. Chair Jerome Powell said Wednesday the central bank could start tapering its monthly purchases of $80 billion of Treasuries and $40 billion of mortgage-backed securities at its November meeting.
“As the recovery continues, labour markets will continue to improve, and I expect that the conditions for liftoff of the fed funds rate will be met by the end of next year,” Mester also told an Ohio Bankers League conference.
Mester’s comment regarding interest-rate liftoff suggests that she is one of the nine FOMC participants that projects at least one rate hike next year. The 18-member committee was evenly split at this month’s meeting as to whether the Fed would raise rates next year or later.
Monetary policy will remain very accommodative even after the Fed starts the tapering process, Mester said. While the Fed’s inflation target has “largely been met,” the labour market is still short of the central bank’s maximum employment goal.
“The number of payroll jobs and the labour force participation rate are still well below where they were prior to the pandemic, and unemployment rates are still well above their pre-pandemic levels,” Mester said.
George separately told the American Enterprise Institute that she expected further strong job gains, with inflation being reduced in part by a shift to more services spending. In addition, she said there could be good reasons to maintain a relatively large balance sheet in the future.
“If the zero lower bound is thought to be a costly constraint on policy, there might be an advantage in pushing towards a higher neutral policy rate, arguing for maintaining a relatively large balance sheet weighted towards longer-maturity assets,” George said.
She added there could be reasons for a smaller balance sheet including “a desire to decrease our footprint in financial markets” and concern about the yield curve.
© 2021 Bloomberg L.P.