The Federal Reserve should cut its $85 billion of monthly bond purchases to near $70 billion when it meets later this month, Kansas City Fed president Esther George said Friday in Omaha.
Her remarks came ahead of the Fed’s Sept. 17-18 meeting at which policymakers are expected to debate whether to slow their yearlong bond purchases that are aimed at speeding the economic recovery.
George, who has dissented at each Fed session this year in favor of pulling back the aggressive policy, emphasized that a move was required.
“It is time to begin a gradual — and predictable — normalization of policy,” she said, according to a copy of her remarks. “The transition is likely to result in episodes of volatility as the markets adjust to the changing policy stance. However, postponing the move to reduce asset purchases won’t ease the inevitable adjustment.”
Anticipation of a reduction in the Fed’s bond buying program led recently to a jump in long-term interest rates. Some economists have said they expect the Fed to cut back on the program in part because markets have begun to adjust for such a shift in policy.
On Friday, the U.S. Department of Labor reported a slight drop in the nation’s unemployment rate to 7.3 percent in August from 7.4 percent in July. The decline stemmed largely from fewer Americans seeking work in the face of a slow-growing job market.
The Fed has tied its policy actions to substantial improvement in the labor market.
George’s call for a cutback in Fed policy clashed with remarks that Chicago Fed president Charles Evans delivered Friday in South Carolina. Both will have a vote in the Fed’s policy decision Sept. 18.
Evans said he had an “open mind” about reducing the central bank’s bond purchases but added that the economic outlook probably would allow the Fed to act “later this year and subsequently wind down these purchases over a couple of stages,” according to Bloomberg News.
The Chicago Fed leader has been seen as most supportive of aggressive Fed action, particularly in tying its decisions specifically to improvement in employment. In his address Friday, Evans said he would like to see greater evidence of economic growth and price inflation before slowing the bond purchases.
“To start the wind-down, it will be best to have confidence that the incoming data show that economic growth gained traction during the third quarter of this year and that the transitory factors that we think have held down inflation really do turn out to be transitory,” Evans said.
George began her speech with a history lesson on the Fed’s birth nearly 100 years ago and the important role that regional Fed presidents play to “bring forward independent views of the U.S. economy.”
She repeated her stance that the Fed’s bond buying actions carry risks and have been of limited benefit to the job market. She also noted that she has been more skeptical than the Fed’s policy committee as a group that the benefits justify the risks.
Businesses have complained that they can’t find qualified workers to fill existing job openings, George said.
“This suggests to me the labor market is facing challenges that monetary policy cannot directly address,” she said.