By CHRISTOPHER RUGABER, economic editor of the AP
WASHINGTON (AP) – Last week’s jobs report demonstrated the continued strength of the US economy and underscored the need for the Federal Reserve to curb its stimulus efforts, a Fed official said on Tuesday.
St. Louis Federal Reserve Chairman James Bullard said Friday’s report, which showed a sizable gain of 943,000 jobs last month, means the economy is making enough progress to start shrinking, or decrease, the $ 120 billion in monthly Fed bond purchases. These purchases, which began last March during the pandemic recession, are aimed at lowering long-term interest rates and supporting the economy.
“It’s not clear to me that we’re really doing anything useful here,” Bullard said of the bond purchases.
Bullard’s comments echo other recent calls from inside and outside the Fed that the central bank should start reversing its ultra-low interest rate policies. Boston Federal Reserve Chairman Eric Rosengren told the AP on Monday that the cut should start its fall. And last week, Fed Governor Richard Clarida said the economy would likely meet the Fed’s criteria to raise interest rates by the end of 2022, a timeline earlier than predicted by the Fed’s policy committee.
Bullard has sketched out an aggressive timeline for the reduction, which he says should start soon and end as early as next spring. This would put the Fed in a position to potentially raise its short-term interest rate near zero, if necessary, to keep inflation from getting worse.
Bullard, who is not a voting member of the 18-person Fed policy-making committee this year, also said many Fed officials underestimate the pace of improvement in the economy, which has significantly outstripped the recovery from the 2009-2009 recession. The interview has been edited for length and clarity.
Q. Tell me a bit more about your declining bond buying schedule.
A. The pace of reduction may be fast enough to end purchases by the end of the first quarter (in 2022). Now, one thing is happening is that the committee set a standard of substantial progress for the phase-out and end of asset purchases, but we put in place another test, which was a complete rework of the labor market. And it’s getting a lot more tangible, I think. For example, if you had job growth of 750,000 over the next eight months or so, you will be back to pre-pandemic employment levels, so it won’t be until the end of March. , in 2022. So I just think people are a little out of step with how fast things are going. These are very high numbers compared to what we’re used to in the US economy, both on the inflation side and on the jobs reporting side, so I think asset purchases are something we can end now.
Q. Do you think people are focusing too much on the last recession and how slowly the recovery preceded? Is there a danger of fighting the last war?
A. That is exactly what is happening! Across the monetary policy community, within the committee (Fed) and outside of the committee, everyone has these ideas in mind about the very slow pace of recovery from the global financial crisis in the United States. And to be fair, it took years to get back to pre-crisis employment levels. It took years for production to return. And we haven’t had inflation for the whole decade. But the situation has changed rapidly in the last five or six months here where vaccines have been released online. They have been very successful. You know, we now have core inflation that is likely to reach 3.5% this year. This is the highest level for 30 years.
Q. Regarding the delta variant, should the Fed take a break and see how this affects the economy before changing its policies?
A. Yes, the economy has already had probably 16 months to adjust to the pandemic and what we have found is that businesses are able to produce, households are able to consume and save, people are able to work. There are ways to manage the economy even during the pandemic. I think the committee should just go ahead and make a decision in September, because I don’t think the asset purchases part of the policy depends on the delta variant. The interest rate part of the policy – the adjustments there are further into the future, you might delay that if it really turns into a major setback.
Q. Should the Fed be very worried about memes and cryptocurrency stocks and some of the other things that are often cited as evidence that market bubbles can form?
A. I think for individual stocks that seem to be trading in a way that is not in line with fundamentals, maybe this is something you can take out. But when you say the housing market is poorly valued, it turned out to be a disaster in the mid-2000s. The goal of asset purchases is to keep long-term interest rates lower than they are. otherwise, in order to influence interest rate sensitive sectors. And if there has ever been a sector sensitive to interests, it is housing. And so you get this rapid increase in prices. I think you also have an aspect of that where you block new homebuyers and homebuyers who might be at the bottom of the income distribution, and they get the market price taken away. So it’s not clear to me that we’re really doing anything useful here.
Q. Do you expect some of the current high inflation levels to persist beyond this year?
A. If you talk to CEOs about their pricing plans, they seem to be very confident that they can pass on the increased input prices they see to their customers without any issues. This dynamic certainly indicates that you would have widespread price increases the rest of this year and into 2022. It suggests to me that this will be a more persistent inflationary shock than what is commonly discussed in financial markets today. ‘hui. I just want to point out how we are not in a position to put downward pressure on inflation, we should end asset buying and then we should raise the (Fed’s interest rate) ) to a level that will put downward pressure on inflation, and we’re nowhere near being able to do that if we have to. That’s why I think it’s a little more urgent.
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