Aug 10 (Reuters) – The current spike in inflation is unlikely to cause the Federal Reserve to tighten monetary policy prematurely, with more months of employment data needed before any changes as well as greater certainty than the pace of price hikes will remain above the Fed’s 2% target, Chicago Fed Chairman Charles Evans said Tuesday.
“We are making progress… We are on the right track,” to the point where it would be appropriate for the Fed to start cutting its $ 120 billion in monthly bond purchases and possibly raising interest rates, said Evans in an online meeting with reporters.
The benchmark for this bond “taper” is expected to be reached “later this year” on the basis of continued strong job growth expected, Evans said.
But unlike some of his colleagues who argue that the Fed should start slowing down bond buying soon, Evans remained among those who believe most strongly that the current price spike is temporary and that the Fed should be aggressive to hold on. its promise to achieve as many jobs as possible. .
The debate over when to reset monetary policy for the post-pandemic era has divided Fed officials, and the three remaining policy meetings this year are expected to see that intensify.
A number of policymakers fear that the current high rate of inflation may become more entrenched, and others like Evans believe it will subside on its own as the economy operates through a complex reopening.
While some fear that the Fed will add to unsustainable asset values with its monthly bond purchases, others believe the recovery is not yet completely over and needs all of the bank’s support. central a little longer.
Evans said he wanted to see “a few more” monthly jobs reports before he felt enough progress had been made to start cutting back on emergency programs put in place to help the economy weather the pandemic.
“Everyone is wondering about September, November, December, January” as possible dates to start cutting bond buying, Evans said. “I don’t think a meeting on either side is going to have a big effect.”
What is more important, he said, is that the Fed applies the new framework it adopted last year and proves it is serious about hitting the maximum number of jobs and hitting a rate of inflation averages 2% over time – catching up with years of inflation. which was considered too weak.
This will mean a few years when inflation will be above 2%, and 2021 will count as one.
Inflation measures observed by the Fed are currently hovering around 3.5% per year, a pace that “really challenges households and businesses. There is no coating of pain,” said Evans.
But he is also skeptical of the duration. While some of his colleagues expect inflation to stay at or above 3% next year, Evans said he expects it to return to almost 2% – an argument for maintaining the policy monetary and credit conditions relaxed.
The Fed once again gambled its credibility by pushing employment up and taking risks by allowing higher inflation in the process.
After committing to this goal, “we shouldn’t preemptively end a strong improvement in the labor market because someone is getting nervous about inflation,” Evans said. “I’m going to be very sorry if we somehow claim victory with an average of 2% and then end up in 2023 with an inflation rate of around 1.8%… That would be a challenge for our executive to. long term.”
Going forward, “the job is going to be good,” Evans said. “Inflation continues to be something that will have to behave differently over the next two years compared to the last 10” to justify rate hikes as early as next year, as some of his colleagues predict.
Reporting by Howard Schneider; Editing by Dan Burns
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