Reduction in asset purchases could start as early as this year, says Fed’s Daly

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The Federal Reserve could begin to slow its ultra-accommodative monetary stimulus by the end of the year, given the strength of the economic rebound, according to a senior US central bank official.

In an interview with the Financial Times, Mary Daly, chairman of the San Francisco Fed, said she was convinced that the robust recovery in household and business activity from the depths of the Covid-19 collapse would continue to gain momentum as more people return to the workforce. and consumer spending remained buoyant, paving the way for a political pivot in the coming months.

“I remain very optimistic and positive about the fall and continued improvements in the key variables that interest us,” she said on Wednesday. “This means to me that it is appropriate to start discussing the reduction in the level of accommodation that we regularly give to the economy, and the starting point for that is of course the asset purchases.

“Talking about the potential reduction of those later this year or early next year, that’s where I am,” said Daly, who has long been one of the more “members”. dovish ”from the Fed advocating a patient approach to withdrawing support.

The Fed has said it will continue to buy $ 120 billion worth of mortgage-backed securities and Treasuries each month until it makes “further substantial progress” on its 2% targets inflation on average and maximum employment.

Daly, who is a voting member of the Federal Open Market Policy Committee, said those thresholds would likely be reached by the end of the year or early 2022.

His comments followed another rise in inflation on Wednesday, which showed year-over-year price gains held steady at 5.4%, although the increase from last month recorded a more subdued pace. Some sectors more susceptible to pandemic disruptions have also experienced slower price increases than in previous months.

The labor market also made significant progress, with 943,000 jobs added in July. The unemployment rate fell to 5.4% from 5.9% in June.

“We are really adding enough jobs to see that we are moving towards our goal of full employment,” said Daly. “We are not there yet. . . [but] we are reducing the hole that has been dug by Covid. “

Nearly 6 million more Americans remain out of work than in February 2020. Daly said she expected the shortfall to narrow as pandemic fears fade, problems of childcare were resolved and improved unemployment benefits were phased out.

The improving economic environment catalyzed vigorous debate among Fed officials about the appropriate pace to withdraw support. Last week marked a turning point, with a growing number of central bankers arguing for a faster withdrawal from financial markets than many initially anticipated.

Kansas City Fed Chairman Esther George, who will be a voting member of the committee in 2022, said on Wednesday it was time to “move from extraordinary monetary policy accommodation to more neutral settings.”

“While recognizing that special factors are largely responsible for the current surge in inflation, the expectation of continued strong demand, a recovering labor market and firm inflation expectations are consistent , in my opinion, to the committee’s guidance on further substantial progress towards its goals, “George said at a seminar hosted by the National Association for Business Economics.” I support stopping asset purchases in These conditions.”

His views closely match those of James Bullard, chairman of the St. Louis Fed, and Robert Kaplan of the Dallas Fed, who said in an interview with CNBC on Wednesday that he supported the announcement in September that the cut would begin. in October. It is also in line with the schedule proposed by Fed Governor Christopher Waller earlier this month, as long as the data on future jobs remains strong.

Raphael Bostic of the Atlanta Fed, Eric Rosengren of the Boston Fed and Thomas Barkin, Chairman of the Richmond Fed, also weighed in this week, each claiming that inflation was already where it needed to be to start reducing. bond purchases.

The main risk to the outlook, according to Fed officials, is the alarming spread of the more contagious variant of the Delta coronavirus – although Daly said it would likely have limited economic impact.

“Overall I don’t think this will derail our recovery,” she said.