Fed Chair Jerome Powell has signalled that the central bank could begin tapering its unprecedented monetary stimulus as early as this year, after finally announcing that the economy has achieved “substantial further progress” in the pandemic recovery.
In a highly anticipated virtual speech at the Jackson Hole, Wyoming, symposium on Friday, Powell acknowledged that the US economy has reached the Fed’s two main goalposts on inflation and employment, signalling that its $120 billion worth of monthly asset purchases could be dialled down before the end of the year. “My view is that the ‘substantial further progress’ test has been met for inflation,” he said, adding that “there has also been clear progress toward maximum employment.”
Indeed, as per the FOMC’s most recent meeting, a significant proportion of members indicated that the time for the Fed to begin tapering should be as early as 2021. And, it appears that Powell has finally endorsed that belief. “At the FOMC’s recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year,” he said.
However, Powell also signalled that an interest rate hike would likely not come until well after asset purchases are phased out. “The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest-rate liftoff, for which we have articulated a different and substantially more stringent test.”
Although Powell has conceded that price pressures have accelerated at a much sharper speed than expected, he still insists that any elevated inflation is merely temporary. But, as incoming data continues to show otherwise, he reassured markets that the Fed has all the tools necessary to act in the event that inflation runs, well even hotter.
“If sustained higher inflation were to become a serious concern, the Federal Open Market Committee would certainly respond and use our tools to assure that inflation runs at levels that are consistent with our goal,” he explained.
In the meantime, markets appear to have responded optimistically to Powell’s comments, as bond yields moved lower before recovering, and stock indexes were sent higher.
Information for this briefing was found via Bloomberg. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.