Federal Reserve officials are preparing to pull back their economic help as inflation remains high and the labor market quickly recovers, and they are clearly signaling that the business cycle is just right. past is a bad template for what happens next.
During the economic expansion that spanned from the global financial crisis to the start of the pandemic, the Fed acted very gradually – they slowly returned to bond-buying to help the economy, then that only narrows the balance sheet of its holdings. Central banks raised the cost of irregular borrowing between 2015 and the end of 2018, the fastest increase at any other meeting.
However, inflation has faded, the labor market is slowly crawling out of the abyss, and business conditions need the Fed’s support. This time is different, a series of Fed presidents pressed on Monday – suggesting that a pullback in policy support is likely to be quicker and more decisive.
Four of the central bank’s 12 regional presidents spoke on Monday and all suggested the Fed could soon start cooling the economy. Central banks are expected to carry out a series of rate hikes starting in March and possibly soon begin to shrink their balance sheet holdings fairly quickly. The pace of the policy retreat is still up for debate and officials reiterated that it will depend on incoming data – but some have also noted that economic conditions are unusually strong.
Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said in a Interview with Yahoo Finance. Any risk “that our policies will lead to a contraction in the economy, I think they are relatively far away.”
Esther George, president of the Federal Reserve Bank of Kansas City, suggested in a speech that while the Fed has taken a long time to begin shrinking its balance sheet, the central bank The center will probably move more promptly in 2022.
“With inflation near a 40-year high, substantial demand growth momentum, and ample signs and reports of labor market tightening, the stance of monetary policy is very appropriate. current is out of sync with the economic outlook,” she said. George, who voted on monetary policy this year.
She notes that conundrums lie ahead about how large the balance sheet can be. Fed holdings have grown to nearly 9 trillion dollarstwice its size before the pandemic.
Miss George estimated that The Fed’s large bond holdings have slashed long-term rates by about 1.5 percentage points — almost halving rates on 10-year government debt. While shrinking the balance sheet presents a risk to the market, she warned that if the Fed remains large in the Treasury market, it could skew financial conditions and undermine its independence. establishment of the central bank’s appreciation for the elected government.
“While it can be easy to make a mistake out of caution, the potential costs associated with an overly large balance sheet should not be overlooked,” she said. She suggested that shrinking the balance sheet could allow policymakers to raise interest rates, which are currently set close to zero, less.
Mary C. Daly, president of the Federal Reserve Bank of San Francisco, also argues for a positive – albeit still gradual – path towards removing policy aid.
She said on the Reuters webcast that the Fed is not behind the curve, but it needs to react to the fact that the labor market is at least temporarily short of workers and inflation is heating up. Price selected by 5.8 percent for the year to December, nearly triple the 2% the Fed targets on average and over time.
“We’re not trying to fight some vicious wage price spiral,” said Ms. Daly. However, she said she might be in favor of a rate hike as soon as March, and suggested that four rate hikes could be justified, a path that would slow things down while “not eliminating completely remove the punch and cause an interruption.”
Even so, she said it would be “misinformation” to suggest that officials are uniting to find a clear path forward – the Fed will have to find out how quickly rates will rise. knowing more about the economy.
Wall Street economists increasingly expect a brisk pace of rate hikes this year: Goldman Sachs and JP Morgan both expect five rate hikes in 2022, and some experts watch the Fed suggested as many times as possible. The market is pricing in a Small but meaningful opportunity that the Fed will raise rates by half a point in March, rather than the more typical quarter-point increase.
Officials have been careful to emphasize that they don’t know what will happen next with policy because the economy is so uncertain — rents are rising and supply chains remain messy, which could drive inflation higher, but Government support programs are waning, which could weigh on demand.
“We are not on any particular trajectory,” Mr. Bostic said.
Mr. Bostic suggested in a Interview with The Financial Times at the end of last week that a half-point rate hike might be appropriate this year, a quick approach to withdrawing policy help that was not used in the previous expansion.
He said on Yahoo on Monday that he didn’t want to raise rates too much in March at this point, though he was “increasingly” seeing that meeting as the right time for the Fed to start raising rates. Like Ms. George, Mr. Bostic also emphasized that this time was different when it comes to the Fed’s balance sheet.
“The economy is getting stronger,” he said. “And we have prior experience that provides us with some guidance on how markets are likely to react when balance sheets shrink. So I think we can be more robust about how we do that. ”
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