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Credit…Daniel Brenner/Bloomberg

Federal Reserve officials are preparing to withdraw economic aid as inflation remains stubbornly high and the job market heals rapidly, and they are clearly signaling that the last economic cycle is a bad model for what comes next.

During the economic expansion that stretched from the global financial crisis to the onset of the pandemic, the Fed acted very gradually – it slowly slowed bond purchases intended to help the economy, then n only painfully reduced its asset balance sheet. Central bankers increased borrowing costs sporadically between 2015 and late 2018, increasing them at every other meeting the quickest.

But inflation was subdued, the labor market was slowly emerging from an abyss, and economic conditions needed support from the Fed. This time is different, a series of Fed chairs pointed out on Monday, suggesting that the pullback in policy support is likely to be faster and more decisive.

Four of the central bank’s 12 regional presidents spoke on Monday, and all suggested the Fed could soon start cooling the economy. Central bankers are widely expected to make a series of interest rate hikes starting in March and may soon begin to reduce their balance sheet holdings quite quickly. The pace of the policy pullback is still up for debate and officials reiterated that it will depend on incoming data – but several also noted that economic conditions are unusually strong.

“The economy is much stronger than it has been, throughout my time in this role, and certainly, during one of the recoveries that we have tried to navigate our politics in recent memory,” Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said in an interview with Yahoo Finance. All the risks “that our policies lead to a contraction of the economy, I think are relatively remote”.

While it took a long time for the Fed to start shrinking its balance sheet last time around, the central bank will likely move faster in 2022, Federal Reserve Bank of Kansas City president Esther George suggested during a briefing. a speech.

“With inflation reaching a nearly 40-year high, considerable demand growth momentum, and numerous signs and reports of labor market tightening, the current highly accommodative monetary policy stance is not in sync. with the economic outlook,” said George, who votes on monetary policy this year.

Tricky questions lie ahead about the size of the balance sheet, she noted. The Fed’s holdings have swelled to nearly $9 trillion, more than double its size before the pandemic.

Ms. George estimated that the Fed’s large bond holdings were weighing on long-term interest rates by about 1.5 percentage points, almost halving the interest rate on 10-year government debt. While the reduction in the balance sheet risks disrupting markets, she warned that if the Fed remains heavily involved in the Treasury market, it could distort financial conditions and jeopardize the central bank’s precious independence from the government. screw the elected government.

“While it may be tempting to err on the side of caution, the potential costs associated with having too large a balance sheet should not be ignored,” she said. She suggested that the reduction in the balance sheet could allow policymakers to raise rates, which are currently close to zero, less.

Mary C. Daly, president of the Federal Reserve Bank of San Francisco, also argued for an active — though still gradual — path toward ending political aid.

The Fed is not behind the curve, she said in a Reuters webcast, but it must react to the reality that the labor market appears to be at least temporarily short of workers and that the inflation is soaring. Prices rose 5.8% in the year to December, nearly three times the 2% the Fed is targeting on average and over time.

“We’re not trying to fight a vicious spiral of wages and prices,” Ms Daly said. Still, she said she could support a rate increase as early as March and hinted that four rate increases might be reasonable, a path that would slow things down while “not completely removing the punch bowl and causing disturbances”.

Even so, she said it would be “misinformation” to suggest officials unite around a clear path – the Fed will have to figure out how fast rates will rise as it learns more about the economy. economy.

Wall Street economists increasingly expect a rapid pace of rate hikes this year: Goldman Sachs and JP Morgan both expect five rate moves in 2022, and some Fed watchers have suggested that up to seven are possible. Markets are pricing in a small but significant chance that the Fed will hike rates by half a point in March, instead of the more typical quarter-percentage-point hike.

Officials were careful to point out they don’t know what will happen next with politics because the economy is so uncertain – rents are rising and supply chains remain messy, which could keep inflation going. high, but government support programs are declining, which could increase demand.

“We are not set on any particular trajectory,” Bostic said.

Mr Bostic had suggested in an interview with the Financial Times over the weekend that a half-point rate hike might be appropriate this year, a quick approach to withdrawing political aid that has never been used in the last expansion.

He told Yahoo on Monday that he didn’t prefer a sizeable March increase at this point, although he “increasingly” viewed this meeting as the right time for the Fed to start raising rates. Like Ms. George, Mr. Bostic also pointed out that this time was different when it came to the Fed’s balance sheet.

“The economy is stronger,” he said. “And we have that prior experience that gives us some guidance as to how markets are likely to react as that balance sheet shrinks. So I think we can be more robust in terms of how we do that.

Garland K. Long