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Fed’s Mester says taper decision should wait until fall



Cleveland Federal Reserve President Loretta Mester on Tuesday said she didn’t want to adjust the central bank’s easy monetary policy stance until the labor market made more progress over the summer.

“We’re on a good path right now with our policy and we’re going to see how things evolve over the summer,” Mester told reporters after a virtual speech to a conference hosted by the Norwegian central bank.

“I would like to see further progress on the employment part of our mandate and that’s what I’m really watching for over coming months,” she added. Mester is not currently a member of the Fed’s policy making committee, the Federal Open Market Committee, but she will be in 2022.

The Fed has been buying $120 billion per month of bonds, and has kept interest rates close to zero, to support the economy and foster stable financial conditions for households and businesses.

With inflation surging this year, many economists think its time for the Fed to slow down, or taper, the purchases.

The Fed has said it would continue the purchases until the economy made “substantial further progress” toward its twin goals of maximum employment and stable average 2% inflation.

Mester said that further progress has been made on the inflation portion of this benchmark but not the labor market.

The Cleveland Fed president noted that many businesses are finding it hard to find workers at the moment but some of the supply constraints may ease in September when schools reopen.

“Rather than recalibrate at this point, let’s see how things progress over the next couple of months. When we get to September, I’ll think we’ll have a little more clarity and then we can make decisions about our monetary policy” and whether substantial further progress has been met, she said.

Left unsaid by Mester, but key for the Fed is the outlook for wages. If workers remain in short supply, companies may have to raise wages. All things being equal, this can lead to higher inflation.

Mester said she thinks inflation will subside next year to the 2% target after spiking over the past few months. But she added that there are more risks that inflation will be higher than she expects rather than lower.

At the moment, in general terms, Fed watchers think that Fed Chairman Jerome Powell may use his speech in Jackson Hole in late August to set the stage for a tapering of asset purchases to start early next year. Some economists and Fed officials are agitating for a quicker move, worried that the Fed might have to adjust policy more swiftly at some point in the future if it doesn’t start to pull back its support for financial markets. When the Fed moves quickly, it tends to send off shockwaves through global markets.

Mester said the Fed was intent on telegraphing its tapering well in advance “so that we’re not surprising anyone.”

Stocks were slightly higher Tuesday building on yesterday’s impressive gains, with the Dow Jones Industrial Average

up 30 points in midday trading.