MNI: Fed's George Says 'Substantial Progress' Already Made

It's time for the Federal Reserve to begin dialing back its QE program because the U.S. economy has already achieved "substantial further progress" toward goals of full employment and price stability, Kansas City Fed President Esther George said Wednesday.

"The expectation of continued strong demand, a recovering labor market, and firm inflation expectations are consistent, in my view, with the Committee's guidance regarding substantial further progress toward its objectives," she said in prepared remarks to a National Association of Business Economics conference. "I support bringing asset purchases to an end under these conditions."

George joins a number of colleagues who have called for the Fed to soon announce the start of a reduction in the central bank's USD120 billion monthly purchases of Treasuries and mortgages. MNI reported this week the Fed is likely to offer advance warning at its September meeting that a taper is coming later in the year.

"Now, with the recovery underway, a transition from extraordinary monetary policy accommodation to more neutral settings must follow," George said. She also said "it is important to note the timing of the tapering of asset purchases is not mechanically connected to the timing of any policy rate adjustment."

Consumer prices jumped 5.4% in the year to July, marking a fourth month of rapid inflation that has caught officials by surprise. At the same time, last week's robust employment report, including a gain of 943,000 new jobs, offered hope of further progress as the economy continues to reopen.

FADING DEMAND DRIVES

Still, George sees "reason to believe that some of the drivers boosting demand and constraining supply will fade over time." That's because supply chain disruptions will get sorted out, workers will gradually return to the workforce, and the bump from strong fiscal spending will fade.

"Additional spending bills under consideration could blunt this drag, but seem unlikely to fully offset it," she said.

George noted uncertainties related to the Delta variant made forecasts more tenuous than usual.

"The upsurge in Covid cases related to the Delta variant threatens renewed restrictions on activity or increased caution on the part of consumers and could delay the recovery across many dimensions," she said.

"Importantly, the effects could be as pronounced on the supply side as the demand side, prolonging the tightness of the economy and maintaining upward pressure on prices."