Fed officials say cut is near, advancing discussion of rate hike

Aug. 9 (Reuters) – Two Federal Reserve officials said on Monday that the U.S. economy is growing rapidly and that while the job market could still improve, inflation is already at a level that could satisfy a key test step for the start. rate hikes.

Atlanta Federal Reserve Chairman Raphael Bostic said he sees the fourth quarter as the start of a reduction in bond purchases, but is open to an even earlier start if the market labor maintained its recent scorching pace of improvement. Additionally, he and Richmond Fed Chairman Tom Barkin have both said they believe inflation has already hit the Fed’s 2% threshold, according to their separate assessments. This is one of the two conditions that must be met before rate hikes can be considered.

Their remarks are a sign that, as Fed officials discuss how and when to cut back on asset purchases, they are also becoming more detailed in their debate on what it will take to meet the target of Fed inflation under the new framework.

Bostic, who has already predicted the start of rate hikes at the end of 2022, pointed to the five-year annual average of the core index of personal consumption expenditure, or core inflation PCE, which, according to his calculation, reached 2 % in May.

“There are many reasons to believe that we could achieve this goal at this time,” Bostic told reporters. But he said the committee has yet to agree on what metrics it will use to measure that progress, which policymakers will need to discuss.

Barkin said the high inflation seen this year may have met one of the Fed’s benchmarks for raising interest rates, although there is still room for the labor market to recover. before rates go up. Based on current Fed policy directions, rates will go up “when inflation hits 2%, which I think you can tell it has already done, and it looks like it’s going to hold up there. “Barkin told the Roanoke, Virginia Regional Chamber of Commerce. .

Their remarks echoed comments by St. Louis Fed Chairman James Bullard last month, who said the current rate of inflation, at 3.5% per year under the Fed’s preferred measure , is well above the central bank’s 2% target and adequate in its view. to compensate for past low inflation, as required by the new central bank framework.

THE LABOR MARKET STILL BEHIND

Under a new framework unveiled last year, Fed officials agreed to leave interest rates at near zero levels until the labor market reaches the employment peak and inflation to average 2%, on the verge of moderately exceeding 2% for some time.

Policymakers said in December they would continue to buy government bonds at the current rate of $ 120 billion per month until there is “further substantial progress” towards central bank targets. in terms of inflation and maximum employment.

With the high inflation levels achieved during the pandemic, Bostic said, the Fed has effectively met the target of “substantial further progress” on inflation.

Further progress is still needed in the labor market, but that could be achieved after a month or two of strong employment improvement, Bostic said. This puts the Fed on a path to start cutting back on buying between October and December, or sooner, if gains in August are stronger than expected, he said.

Barkin did not specify a timeframe for when the Fed could start cutting back on asset purchases, but said he was monitoring the employment-to-population ratio to assess whether the labor market had made enough progress towards targets. the Fed.

In terms of the structure of the reduction, Bostic said he supports a “balanced” approach that cuts mortgage-backed securities and Treasury securities at the same rate. He also said he would be in favor of reducing asset purchases over a shorter period of time than the Fed has done before. “I’m in favor of going relatively fast,” Bostic said.

Reporting by Jonnelle Marte and Howard Schneider; Editing by Steve Orlofsky and Chizu Nomiyama

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