Two regional Fed governors said Friday that the U.S. economy has met the conditions under which the Fed will soon begin to reduce its asset purchases.
"I support reducing purchases from November and ending purchases in the first half of next year," said Loretta Mester, president of the Federal Reserve Bank of Cleveland. Separately, Kansas City Fed President Esther George said that "the criteria for further substantial progress have been met," referring to the prerequisites set by the Fed for underweight asset purchases.
Mester and George, both more hawkish Fed officials, expressed support for this week's policy decision by the Federal Open Market Committee (FOMC). FOMC said in its policy decision that there may soon be a reason to reduce purchases. Federal Reserve Chairman Jerome Powell said Wednesday that the central bank may start scaling back its asset purchases of $80 billion a month in Treasuries and $40 billion in mortgage-backed securities at its November meeting.
"as the recovery continues and the labour market will continue to improve, I expect the conditions for an increase in the federal funds rate to be met by the end of next year," Mester said at a meeting of the Ohio Bankers Union.
Mester's comments on the first rate hike suggest that she is one of nine FOMC attendees who expect to raise interest rates at least once next year. Of the 18 attendees at the FOMC meeting, half were for and against raising interest rates next year.
Mester said that after the Fed starts to reduce the size, monetary policy will remain very loose. Although the Fed's inflation target has been "largely achieved", the labor market has yet to meet the Fed's maximum employment target.
"Employment and labour force participation rates are still much lower than they were before the pandemic, and the unemployment rate is still much higher than before the pandemic," Mester said.
George, president of the Kansas City Fed, said at an event at the American Enterprise Institute that she expected further strong job growth and that the shift of more consumption to service spending would partly dampen inflation. In addition, she says there may be good reasons to maintain a relatively large balance sheet in the future.
"if the lower zero limit is seen as a costly constraint on policy, it may be advantageous to move towards higher neutral policy rates, which in turn supports a balance sheet with a higher share of longer-term assets and a relatively large balance sheet," George said.
She added that there may also be reasons to keep a smaller balance sheet, including "a desire to reduce our footprint in the financial markets" and concerns about the yield curve.