Mester of the Fed: it is very convincing that the Fed removes the accommodation

The Fed Mester speaks and says:

  • If we can get past the pandemic, we will see inflation measures, retreat
  • There are a lot of things that are driving inflation up now, including supply chain issues and wages.
  • We went from inflation due to a pandemic to something bigger
  • The onus is on the Fed to do what it needs to do to avoid an extraordinary combination
  • Depending on how the economy evolves, some of the more distant rate hikes may need to be brought forward
  • The case is very convincing that we are removing the hosting
  • The Fed is also considering what it can do on the balance sheet to bring down asset levels
  • If things look like they are today in March, she would support the lifting of zero rates at this point
  • Due to demographics the trend of labor market participation is down and we are back to that trend
  • The Fed will need to take policy action to ensure that inflation expectations stay in line with the 2% target
  • The economy has fundamentally returned to full employment and above the inflation target
  • The effects of the reduction in the balance sheet will depend on the current state of the economy
  • The Fed must be cautious and humble before quantifying the effects of balance sheet cuts
  • The Fed needs to set an appropriate path for the balance sheet and then see what the effects are
  • Shrinking the balance sheet and increasing interest rates both remove accommodation but do not yet tighten monetary policy
  • Personally believes that shrinking the balance sheet at a faster pace because the economy is in a stronger position and the balance sheet is in a higher position
  • Fed to reduce the balance sheet is quick they can without disrupting financial markets
  • A strategy the Fed could use to sell its assets, does not want to take anything off the table
  • Even without an active sale, there will be a reduction in the balance sheet due to the maturity of the holdings
  • She would like to consider a larger buyout as the balance sheet is reduced
  • The Fed has yet to vote on a plan to reduce its balance sheet
  • Still wants to be communicative and transparent, but pandemic is forcing Fed officials to be more nimble
  • There is no sense that the Fed wants to surprise anyone with its policies

Mester has been more hawkish and is certainly looking to take back his accommodation as soon as possible. She made her comments in an interview with the Wall Street Journal.

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