A Senior Official Says Fed Will “Pull” With Faster Bond Buying


The head of the Federal Reserve Bank of New York, John C. Williams, said the latest variant of the coronavirus could prolong bottlenecks and famines causing inflation to warm more than expected, a risk Fed officials will consider while “contradictions”. ” by how quickly economic support will be removed.

It’s too early to know how the Omicron variant, which public health officials in South Africa identified last week, will affect the economy, Mr Williams said in an interview with The New York Times on Tuesday. But if the new version of the virus sparks another wave of infections, it could exacerbate the disruptions that caused prices to rise the fastest in three decades.

“Obviously it adds a lot of uncertainty to the look,” Mr Williams said of the new variant. He then added that a risk with the new variant is that it will “perpetuate this excessive demand in areas without capacity and stop the recovery in areas where we really have capacity”.

He said this would “mean a slightly slower recovery overall” and “increase these inflationary pressures in high demand areas”.

Mr Williams’ comments are the latest indication that policy makers are increasingly concerned about inflation and weighing how to respond. Fed Chairman Jerome H. Powell said on Tuesday that the central bank can take action to withdraw economic support came faster than originally anticipated, suggesting that such a decision could come as soon as the Fed’s December meeting.

The Fed was buying $120 billion in government-backed securities each month for most of the pandemic to keep money flowing in financial markets to support the economy. in November, officials announced It plans to phase out this program until the end of the year and the first half of 2022, a process known as “downsizing”. But Mr. Powell said on Tuesday that the central bank could complete its bond purchase faster.

Mr Williams, vice chair of the Fed’s policy-making Open Market Committee and chief adviser to Mr. Powell, did not openly support a faster contraction, saying “there is a lot to learn, digest and reflect on”. next meeting.”

However, he stressed that the economy has rebounded more strongly this year than he and other officials had expected, and said the unemployment rate was falling rapidly. He said economic strength in a time of high inflation may require less Fed support.

“The question is, given how strong the economy is, does it make sense to end these purchases a little sooner, maybe a few months later?” said. “It’s a decision, a debate, I guess we’re going to have to grapple.”

Inflation has proven to be a more challenging problem than the Fed and most private sector economists had anticipated earlier this year. in March, Fed officials said their preferred measure of inflation would increase consumer prices by 2.4 percent by the end of 2021; They arrived until September revised this estimate to 4.2 percent.

This is likely to increase further. The inflation indicator preferred by the central bank rose by 5 percent. last reading. Policymakers watch closely to see what happens in a process. Consumer price index The report to be released on December 10, just before the Fed. meeting on 14 and 15 December.

Mr Williams acknowledged that inflation was stronger and more persistent than he had initially expected. But he said the error was not due to a misunderstanding of how the economy works; rather, it was his inability to predict that the pandemic itself would resurface. Mr. Powell made similar comments in his testimony to the Senate on Tuesday.

The spread of the Delta variant over the summer delayed workers’ return to the workforce by disrupting childcare and making some people nervous to return to face-to-face work. It has also contributed to supply chain problems by causing a new round of factory shutdowns in parts of the world and extending the pandemic-era shift in consumer spending from services to goods.

“All of this – I think largely, not entirely, but largely – things are geared towards Covid and the ability for us so far to get it under control,” he said. “It’s just taking a lot longer than expected.”

The new variant, Mr Williams added, “has the potential to prolong this process we’re going through.”

If the Omicron variant further delays the return of workers and easing the shortage of supplies, this could lead to greater and longer-lasting inflation. But a new wave of virus cases could also hurt the demand side of the economy, prompting people to spend less at restaurants and movie theaters, triggering a new wave of layoffs.

This will put the Fed in a difficult position, forcing it to choose between withdrawing support for the economy in the face of rising unemployment or allowing inflation to accelerate uncontrollably.

Mr. Powell acknowledged that at times, two parts of the Fed’s job could be — promoting maximum employment and keeping prices stable. go into tension. He gave a nod to the conflict again on Tuesday, while emphasizing that controlling inflation is a critical goal.

“We’re going to need a long stretch to get back to the kind of large labor market we had before the pandemic,” Powell said. “We will need price stability to achieve that.”

Mr Williams said he was confident the Fed could chart a course that would allow the labor market to continue to improve while simultaneously reining in inflation.

“How you deal with these trade-offs is something we’ve been working on for a long time and have experience with,” he said. He added that he has seen little evidence so far that consumers and businesses are beginning to expect higher inflation over the long term – a key concern for the Fed, as a permanent change in expectations could make inflation harder for policymakers to control.

“If inflation stays too high for too long, it will eventually seep into people’s long-term inflation expectations,” he said.

Fed officials will know more about the Omicron variant by the time they hold their meeting in mid-December. They will also better read the state of the economy until then. On Friday, the Department of Labor will release its monthly report on employment and unemployment, and an inflation update will provide new evidence.

But Mr Williams said the long-term effects of the pandemic are more difficult to measure. The brief increase in activity during the pre-delta summer indicates that many Americans are willing to revert to their old ways of face-to-face socialization. But other changes at work may be more permanent, affecting the economy in ways that are difficult to predict.

“Now that we’ve learned to live this way, are we going back to the old ways?” He asked. “I have to say, I don’t know.”



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