EXCLUSIVE, Bostic, of the Fed, says it is “reasonable” to start reducing bond purchases in October

WASHINGTON, Aug. 27 (Reuters) – It would be “reasonable” for the Federal Reserve to cut its bond-buying program in October if strong labor gains continue, “Atlanta Fed Chairman Raphael said Bostic, in the last call of an American central banker Start reducing purchases soon and finish them quickly.

The Fed has been buying $ 120 billion in U.S. Treasury bonds and mortgage-backed securities every month to curb the economic consequences of the coronavirus pandemic, but is now heading to reduce the stimulus as the recovery gain momentum.

“I would be comfortable with an October schedule to start this” if U.S. job growth in August coincides with the nearly one million jobs that were added in each of the previous two months, he said. Bostic told Reuters in an interview published Friday.

The Fed could announce a plan to “reduce” asset purchases at the Sept. 21-22 policy meeting. A change is expected sometime this year, and there is still debate about when the plan should be announced and how quickly purchases should be reduced.

Bostic said that once the taper began, it was “definitely looking to get it done as quickly as possible” and could support the full completion of Fed asset purchases “by the end of the first quarter” of 2022.

He spoke to Reuters ahead of the marquee’s Jackson Hole research conference, which will begin Friday with a speech by Fed Chairman Jerome Powell. Bostic is a voting member of the Fed’s policy-making committee this year and joins a vocal group made up primarily of Fed regional bank presidents who are ready to end one of the central bank’s pandemic programs.

Beyond the narrow debate, however, Bostic delved deeper into the discussion of the Fed’s next phase on when to raise interest rates.

Earlier this year, he said he expected inflation to be stronger than expected and anticipated that the Fed will have to raise its interest rate overnight above the current level of almost zero in sometime in 2022, a step towards moderating economic expansion to ensure prices remain under control. Most of his colleagues do not see rates rising until 2023 or later.

But more fundamental than the moment, Bostic said he felt Fed officials needed to start talking more accurately about how their new approach to inflation will be developed in practice, especially now that the pace of growth of prices has run faster, for longer, than expected.

This year’s inflation is driving up 4% and the pace of price rises has been so strong this year that it has driven average U.S. inflation over a period of several years to the 2% target of Fed. Read more

Under a new approach taken a year ago, the Fed is focusing on that average figure and will allow high inflation “overruns” to help achieve it. But the central bank is not explicit about how long the average period should run or how much an overrun could be tolerated.

“With a few simple metrics we have already met the target,” Bostic said, adding that the Fed will face inevitable questions about what criteria it will use. “We should be transparent in the market. This is our first round going through this and we are approaching this benchmark, so I think it’s worth thinking about how to communicate and point more directly to where we think we are.”

A second commitment, to get the economy to “maximum employment”, is also not defined, but assessments of this will have to be a “game decision” for Fed officials to weigh on the recovery of the labor market facing the risks of inflation that may arise, Bostic said. .

The Fed has said labor gains should be “broad and inclusive,” but Bostic said at the same time that “there is no consensus opinion on a metric” to measure the integrity of a job recovery .

“There is no net analogy in terms of employment relative to what we have for inflation,” he said. If a rise in the interest rate seems necessary, but the recovery of the job seems to be over between the different demographic groups, “policy makers … will have to decide and weigh the risks of tolerance … There is a learning curve on how to play “.

“MATTER”

However, for the most imminent decision on reducing bond purchases, Bostic said the figures are starting to add up.

A gain of about 700,000 or more jobs in August would mean that the U.S. economy will have recovered half of the 10 million jobs missing due to the pandemic as of last December, when the Fed he promised to continue his bond purchases until there had been “substantial” further progress ”in the recovery.

“That’s the math I’m doing,” Bostic said.

There are other calculations in the mix, including the extent to which an increase in coronavirus cases fueled by the highly contagious Delta coronavirus variant harms the economy.

Concerns about COVID-19 risks led to the cancellation last week of the face-to-face portion of the Fed’s Jackson Hole conference in Wyoming. It will be held on a virtual platform for the second year in a row.

The change highlighted the risks the Fed faces when planning its transition from the emergency programs established in the spring of 2020 to the policies needed to manage the explosions of economic growth and inflation reminiscent of seventies.

Bostic said the rise and spread of the Delta variant had so far not changed its economic outlook in any fundamental way.

“What I’ve seen is a suggestion that things are slowing down, but they’re still slowing down from extremely high levels. I haven’t seen big changes in the underlying dynamics,” Bostic said.

Report by Howard Schneider Edited by Paul Simao

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