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Dec. 2 (Reuters) – Federal Reserve policymakers on Thursday appeared optimistic about the economic impact of the latest variant of COVID-19, but signaled rising inflation in remarks suggesting a growing consensus for a faster end of bond purchases and, perhaps, earlier interest rate hikes Next year.
Atlanta Fed Chairman Raphael Bostic told Reuters Next on Thursday that it would be appropriate to end the central bank’s bond purchase program by the end of March to allow the Fed to raise rates to cope with inflation.
The Fed, which began cutting its bond purchases last month at a rate that would end the program by June, is expected to consider reducing that timeline when policymakers meet on December 14 and 15.
With robust growth, an improving labor market and inflation more than twice the Fed’s 2% target, “I think it would be in our best interest to finish this sometime before the end of the first one. quarter, ”Bostic said.
And if inflation continues up to 4% until next year, as some forecasters predict, “there will be good reason to believe that we should raise interest rates further and maybe even do so. more than the one I suggested. in pencil. “
Only half of Fed policymakers thought in September that the Fed should start raising rates next year, the rest expecting the first rate hike in 2023. Since then, many appear to have changed their hike expectations. earlier rates.
After the Fed’s hawkish comment this week, rate futures traders are now seeing the Fed’s first rate hike in May.
While the severity and transmissibility of the new Omicron variant will determine how scared people are, Bostic said each successive wave of COVID-19 has resulted in milder economic downturns. If this holds, the economy will continue to grow because of it, he said.
Bostic is not the Fed’s only hawkish voice. Earlier this week, Fed Chairman Jerome Powell said he wanted a faster cut schedule on the table at this month’s meeting.
Bostic said he saw no “tension” between the Fed’s two goals of price stability and full employment at this time. Once the Fed starts to raise rates, he said, it will likely do so at a “slow and steady” pace. However, if inflation does not fall as expected over the next two years, it may need to “take more aggressive steps” to bring it under control, he said.
But other Fed policymakers appear increasingly worried that they will have to curb growth before the labor market fully recovers and millions of unemployed Americans find jobs.
“If we didn’t have higher inflation readings, you could let the economy go a bit deeper to see if we can get through COVID and bring these people back,” the San Francisco Fed President said, Mary Daly, who just last month called for “patience” in the face of high inflation.
“At the moment, we are dealing with inflation above our target and inconsistent in its current readings with our longer-term views on price stability,” Daly said at a virtual event hosted by the Peterson Institute for International Economics. “We have to manage this. “
Speaking alongside Daly at the Peterson event, Richmond Fed Chairman Thomas Barkin said it was important for the Fed to keep long-term inflation expectations anchored. “I take real inflation and its impact seriously, and that is why I support the normalization of policy as we do,” he said.
Fed Governor Randal Quarles, in his last public appearance before stepping down this month, took an even more hawkish stance. He told an American Enterprise Institute event that he believed “higher and sustained demand” was fueling inflation and that the Fed should “constrain that demand” to allow supply chains to expand. catch up.
Given the strength of the economic data, “I would certainly be in favor of advancing the end of the phase-out,” he said. If inflation is still above 4% by next spring, the Fed will have to consider rate hikes, he said.
The Omicron variant could extend some of the supply chain challenges. “On the supply side, that means inflationary pressures are likely to persist even longer,” Kristin Forbes, professor of economics at MIT’s Sloan School of Management, told Reuters Next.
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Reporting by Ann Saphir, Lindsay Dunsmuir and Dan Burns; Editing by Chizu Nomyama and Cynthia Osterman
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