MNI: Waller Sees Fed Rate Hike Soon After Taper Ends

Federal Reserve Governor Christopher Waller said Friday the U.S. labor market is closing in on maximum employment and a hike in the fed funds rate will likely be warranted shortly after the central bank ends its asset purchases in mid-March.

Waller "strongly supported" the FOMC's decision earlier this week to speed up the pace of tapering of asset purchases. "This action gives us increased flexibility to adjust monetary policy as needed in 2022," he said.

"Given my expectations for inflation and labor market conditions, I believe an increase in the target range for the federal funds rate will be warranted shortly after our asset purchases end," Waller said in his remarks to be given to the Forecasters Club of New York. "By choosing to speed up our reductions in asset purchases, the FOMC is providing flexibility for other adjustments to monetary policy, if needed, as early as spring to accommodate changes in the economic outlook."

"The economy is set to continue growing very strongly through at least the first half of next year, and I expect employment to keep growing. With the unemployment rate at 4.2 percent in November, I believe we are very close to meeting the FOMC’s maximum-employment goal," Waller said according to prepared remarks.

"Accounting for retirees leaving the workforce, I estimate that employment is only about 1-1/2 million jobs below its February 2020 level, when monetary policy was less accommodative and unemployment was at a 50-year low" and below FOMC estimates of longer-run neutral at 4%, he said.

The Fed Governor did note the Omicron variant as a "big uncertainty" that could impact the economy in either direction.

"COVID has changed a lot of things, and we need to consider if it has persistently changed a significant number of people’s desire to go back in the labor force," he said, adding that his baseline is still for price increases to moderate and for the U.S. economy to grow at an annual rate of 6 to 7% this quarter and nearly that much in Q1 2022.

"We still don’t know how serious a public health threat it will be, so we don’t know if it will slow the U.S. economy, as the Delta variant briefly did, or even possibly slow progress toward maximum employment. Cutting the other way, we also do not know if Omicron will exacerbate labor and goods supply shortages and add inflation pressure, derailing the moderation of inflation next year that is my baseline."