Federal Reserve chairman Jerome Powell hinted on Friday that the central bank is likely to begin pulling back some of its monetary policy before the end of the year, though he sees rate hikes in the distance.
In an anticipated speech at the Fed's annual symposium in Jackson Hole, Wyoming, Powell said the economy has reached a point where it no longer needs so much political support.
That means the Fed will likely start cutting the amount of bonds it buys each month before the end of the year, as long as economic progress continues. Based on testimony from other central bank officials, a cut could already take place at the Fed meeting on September 21-22.
However, this does not mean that rate increases are on the horizon.
“The timing and pace of the upcoming reduction in bond purchases will not be a direct signal as to the timing of the rate hike, for which we have formulated a different and much more stringent test,” Powell said in the prepared remarks for the virtual summit.
He added that while inflation was solidly around the Fed's target rate of 2%, "we still have a lot of ground to cover to achieve maximum employment," which is the second pillar of the central bank's dual mandate and is necessary. before rate hikes occur.
Markets reacted positively to Powell's comments, sending major stock indices to record highs while government bond yields fell.
Later in the day, Fed Vice Chairman Richard Clarida said he agreed with Powell's remarks and expected the cut to last as long as the pace of job growth continues this year, even though none of the officials set a specific date for the process to begin fixed.
"I think if that happens I would support reducing the pace of our shopping later this year," Clarida told CNBC.
Powell also devoted an extensive passage in his speech to explaining why he continues to believe that the current rise in inflation is temporary and will eventually fall to the target level.
The Fed has used the phrase “significant further progress” as a measure of when it will start tightening monetary policy. Powell said "the test for inflation has passed" while "there has also been significant progress towards maximum employment". He said he and his counterparts agreed at the July Federal Open Market Committee meeting that "it may be appropriate to slow the pace of asset purchases this year."
This question about the "tapering" of the minimum monthly bond purchases of 120 billion
In an effort to revive the economy in the early days of the Covid-19 pandemic, the Fed cut its policy rate to near zero and accelerated its bond-buying or quantitative easing program until its balance sheet is now nearly $ 8.4 trillion, about twice as high as in March 2020.
At last year's Jackson Hole Summit, also held virtually, Powell outlined a bold new policy initiative in which the Fed committed to full and inclusive employment, even if that meant inflation would run hot for a while. Critics claim that politics is partly responsible for the current price pressure at the highest level for around 30 years.
Powell defended the policy on Friday, however, stressing the importance of the Fed not taking an "inopportune political move" in response to temporary economic fluctuations such as this year's inflationary moves.
"Today, with significant weaknesses in the labor market and the pandemic ongoing, such a mistake could be particularly damaging," he said. "We know that prolonged unemployment can permanently damage workers and the productive capacity of the economy."
The unemployment rate was 5.4% in July, up from its April 2020 high of 14.8%, but it still reflects a labor market that is still doing well where it was before the pandemic. In February 2020, unemployment was 3.5% and there were 6 million more Americans who were employed and 3 million more than who were employed.
Powell noted that the Delta variant of Covid poses "a short-term risk" to the return to full employment but insisted that "the prospects for further progress towards maximum employment are good".
He added that some of the factors driving inflation are gradually easing, although several regional Fed presidents have told CNBC in recent days that they are seeing continued pressure in their districts.
“Inflation at this level is of course a cause for concern. However, that concern is mitigated by a number of factors that suggest these elevated levels are likely to prove temporary, ”he said.
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