Federal Reserve Chairman Jerome Powell said the central bank could start cutting its monthly bond purchases this year, though it will be in no rush to start raising interest rates thereafter.
The economy has now passed the test of “additional substantial progress” towards the Fed’s inflation target that Powell and his colleagues said would be a precondition for reducing bond purchases, while the labor market has also made a ” clear progress, “the Fed chief said Friday in a virtual speech at the Kansas City Fed’s annual Jackson Hole symposium.
At the Fed’s most recent policy meeting in late July, “I was of the view, as did most participants, that if the economy was doing broadly as anticipated, it might be appropriate to start slowing down asset purchases this year. “Powell said. .
“The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the delta variant,” he said. “We will carefully assess incoming data and evolving risks.”
Investors took news of the impending overhaul in stride, avoiding any hint of the so-called “tantrum” of 2013 when the Fed surprised markets by unexpectedly announcing that it would begin to reduce asset purchases. The S&P 500 rose during the long-awaited direction to more than 0.6% higher. Ten-year Treasury yields fell slightly to around 1.33% and the dollar fell.
President Powell stuck to the script in his Jackson Hole speech; anyone who expected direction at the time of downsizing will have been disappointed, but it was never likely, “said Ian Shepherdson, chief economist at Pantheon Macroeconomics.
At the July Federal Open Market Committee meeting, most Fed officials agreed that it would probably be appropriate to start cutting the central bank’s bond purchase program by $ 120 billion a month before the end of the year, according to a meeting record. Some are pushing for it to move next month.
Policy makers would like to wrap up purchases before interest rates start to rise, and several in June saw a possible need for rate hikes starting in 2022 amid inflation that is above target. 2% from the central bank. The Fed lowered its benchmark rate to almost zero and relaunched the crisis-era buying program last year at the start of the pandemic.
Powell cautioned that a move to begin liquidating the bond buying program should not be interpreted as a sign that rate hikes will follow soon.
“The timing and pace of the next reduction in asset purchases will not be intended to convey a direct signal as to when interest rates take off, for which we have articulated a different and substantially stricter test,” Powell said.
“We have said that we will continue to maintain the target range for the federal funds rate at its current level until the economy reaches conditions consistent with peak employment, and inflation has reached 2% and is on track to moderately exceed 2% during some time. “He said.” We have a long way to go to reach maximum employment, and time will tell if we have reached 2% inflation in a sustainable way. ”
Many of the regional Federal Reserve chairs who spoke Friday morning, including Raphael Bostic of Atlanta, Loretta Mester of Cleveland, Robert Kaplan of Dallas and James Bullard of St. Louis, repeated their views that they are in favor of it. tuning begins soon.
Quarterly projections released in June showed that seven of the 18 FOMC participants thought it would be appropriate to start raising rates next year, while six more expected rate increases would be appropriate for 2023.
“Online, tapering is still on track and the next question is when will it be appropriate to raise,” wrote Ian Lyngen, head of US rate strategy at BMO Capitol Markets, in a note to clients. “This will depend on the data and implicitly a function of the path out of the pandemic and towards the new normal.”
Powell’s statements of late, when it comes to job market recovery and racial equity, have resonated and aligned with the Biden administration’s vision of the economy, in the White House thinking.
The Fed chief spoke as investors awaited a decision from President Joe Biden on whether to reappoint him for a second term or elect someone else. Bloomberg reported Thursday that Biden’s advisers were considering recommending Powell’s reelection.
Total employment in the United States is still about 6 million jobs below pre-pandemic levels. June and July were strong months for hiring, as restrictions on service industries across the country were lifted, but the recent spread of the delta variant of the coronavirus is generating uncertainty about the outlook for the coming months.
The Fed chairman stuck to the central bank’s message that the current outbreak of inflation is likely to be transitory, emphasizing that the recent surge “so far is largely the product of a relatively small group of goods and services that have been directly affected by the pandemic. ” and the reopening of the economy ”and should be expected to dissipate.
Powell noted that there is little evidence of a “wage and price spiral,” where wage increases could threaten excessive inflation.
He pointed to measures of inflation expectations as a sign that consumers, companies and investors also share that assessment, and highlighted the risk that downward pressures on inflation, such as those observed in the last decade, will reassert once end the pandemic.
“While the underlying global disinflationary factors are likely to evolve over time, there is little reason to think that they have suddenly reversed or decreased,” Powell said. “It seems more likely that they will continue to weigh on inflation as the pandemic goes down in history.”
This year’s symposium, typically a high-profile retreat attended by central bankers from around the world, was originally scheduled to return to its usual in-person format, but the Kansas City Fed scrapped that plan on August 20 amid an increase in coronavirus cases in Teton County, Wyoming.
During last year’s virtual proceedings, Powell unveiled a new strategy for monetary policymaking that marked the conclusion of an internal review that lasted nearly 20 months.
The new framework dictates that Fed officials allow economic expansion to advance more than in the past before raising interest rates, to lower unemployment rates faster and allow low-income groups to share in the benefits of a strong economy.
That also means allowing inflation to surpass the central bank’s 2% target for a time, to compensate for periods emerging from recessions when it falls short of the target.
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