Federal Reserve Bank of Cleveland President Loretta Mester told Bloomberg she is open to a faster timetable for dialing back the Fed’s asset purchases to make space for more interest rate hikes if needed to tame inflation, with central bank officials previously saying they wouldn’t start raising rates until the bond buys are fully phased out.
“The momentum in the economy is clear,” Mester said. “We’ve seen very strong labor markets, we’ve seen very strong price pressures and high inflation rates.”
Consumer price inflation accelerated its monthly pace in October and, on an annual basis, hit a 31-year high, while the number of job openings remains close to record highs and businesses continue to report hiring difficulties despite boosting wages to attract badly needed staff.
Still, Fed Chair Jerome Powell said in recent Senate testimony that there’s still some ground left to cover in the labor market recovery, a key touchstone for the Fed. Powell said it’s taking longer than expected for the labor force participation rate, which has been stuck at historically depressed levels for some time, to edge back up.
“To get back to the kind of great labor market that we had before the pandemic, we’re going to need a long expansion,” Powell told a Senate panel on Nov. 30, though he warned that stubbornly high price pressures posed a risk to the recovery and said it was time to “retire” the word “transitory” in reference to inflation from the Fed’s messaging.
Powell also said in Tuesday’s testimony before the Senate Committee on Banking, Housing, and Urban Affairs, that he expects factors driving up inflation to stick around “well into next year,” though he maintained the view that higher prices were being caused by supply-side bottlenecks that would ease over the course of 2022, leading inflation to “move down significantly.”
In follow-on testimony Wednesday before the House Financial Services Committee, Powell said that while it’s likely supply and demand imbalances would get ironed out as the pandemic eases and cause inflation to tick down, he said it’s a forecast, not a sure thing.
Powell on Tuesday signaled a sharper turn towards tightening monetary policy on the part of the Fed than officials previously indicated, saying it could be “appropriate” for policymakers to consider tapering the bond-buys faster. At their most recent meeting in early November, Fed officials voted to start dialing back the $120 billion in monthly asset purchases at a pace of $15 billion per month, which would phase out the stimulus program over eight months. At the same time, they ruled out any interest rate increases before the wind-down of the asset buys.
A number of economists have called for a faster taper schedule, with former Treasury Secretary Larry Summers recommending five months, not the current eight.
Mester, in the interview with Bloomberg, said fading the program more quickly would give the Fed more scope for raising rates sooner, if conditions warrant.
“Making the taper faster is definitely buying insurance and optionality so that if inflation doesn’t move back down significantly next year, we’re in a position to be able to look where we are and hike if we have to,” she said.
Surging inflation has become a key issue amid the pandemic-era economic rebound, with experts pointing to such factors as central bank and fiscal stimulus, “Great Resignation” labor shortages, and supply chain dislocations.
