The United States is nearly ready for the central bank to pull back on its stimulus, and the high inflation may soon retreat, a Federal Reserve official said Tuesday.
The Fed last month signaled it would “soon” be ready to begin the process of ending its massive monthly purchases of bonds and other securities intended to help the country weather the Covid-19 downturn.
In a speech to the Institute of International Finance, Fed Vice Chair Richard Clarida said the world’s largest economy was nearing completion of the “substantial further progress” test the central bank has set to determine when to back off its stimulus policies.
“I myself believe that the ‘substantial further progress’ standard has more than been met with regard to our price-stability mandate and has all but been met with regard to our employment mandate,” Clarida said.
He noted that members of the bank’s policy setting committee last month overall agreed that unless the economic situation changes dramatically, “a gradual tapering of our asset purchases that concludes around the middle of next year may soon be warranted.”
The Federal Reserve is currently buying $80 billion in Treasury bonds and $40 billion in mortgage-backed securities each month, which they started last year as the Covid-19 pandemic caused an unprecedented downturn.
However those purchases have been criticized for helping fuel the inflation that’s risen throughout 2021 as global economics rebound and supply chains deal with resurgent demand.
Clarida said the 2.9 percent annual pace of US inflation as reported by the Commerce Department since February 2020 “is well above what I would consider to be a moderate overshoot” of the bank’s two-percent goal.
“Fully reopening the $20 trillion economy this year is taking longer and costing more than it did to shut it down last year,” he said, but added he believes inflation will edge back towards the Fed’s goal.
“The unwelcome surge in inflation this year, once these relative price adjustments are complete and bottlenecks have unclogged, will in the end prove to be largely transitory,” Clarida said.
However Atlanta Federal Reserve Bank President Raphael Bostic warned that higher inflation could persist.
“I think inflation is likely to remain above two percent going forward. How far forward I cannot say. But upside risks are salient,” he told the Peterson Institute of International Economics on Tuesday.