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New York Fed President John Williams said Monday the central bank could start paring back its monthly USD120 billion QE program "soon" if there is further good progress on job creation.
"Assuming the economy continues to improve as I anticipate, a moderation in the pace of asset purchases may soon be warranted," Williams, the vice chair of the FOMC, said in prepared remarks. His view echoes the language used in the FOMC statement issued last week and comments from Chair Jerome Powell.
"It's clear that we have made substantial further progress on achieving our inflation goal," he said referring to the Fed's criteria for tapering QE. "There has also been very good progress toward maximum employment."
But Williams stressed that a reduction in bond purchases does not mean a signal for rate hikes is imminent. "There is still a long way to go before reaching maximum employment, and over time it should become clearer whether we have reached 2% inflation on a sustained basis."
"It is important to remember that even after the asset purchases end, the stance of monetary policy will continue to support a strong and full economic recovery and sustained attainment of 2% average inflation," he added.
Williams also sounded a note of caution, slightly moderating his view on GDP growth to around 5.5% to 6% this year. "At the same time, we're seeing indications that the labor market recovery is being impaired by the recent COVID surge," he said.
Stressing that a full recovery means a recovery in employment, not just lower unemployment, the New York Fed chief also cited the relationship between participation and unemployment. "The participation cycle lags behind the unemployment cycle, which is an important feature to keep in mind in assessing the state of the labor market."
And while he expressed confidence that inflation, which has been running well above the Fed's target in recent months, will prove to be temporary, it could take longer for supply chains to adjust.
"This process of adjustment may take another year or so to complete as the pandemic-related swings in supply and demand gradually recede," he said. "As the economy gets through these highly unusual dynamics, I expect inflation to come back down to around 2% next year."