The Federal Reserve will likely start backing away from its pandemic-era monetary policies by the end of the year, Chairman Jerome Powell said during a much-anticipated annual speech.
Powell, speaking virtually at the Fed’s annual Jackson Hole symposium, indicated that the central bank may begin tapering its monthly bond purchases before the start of 2022, given the economy’s gains on inflation and employment. However, he made the point to separate tapering from future interest rate hikes.
“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,” Powell said.
FED’S POWELL SAYS INFLATION COULD BE ‘HIGHER AND MORE PERSISTENT’ THAN EXPECTATIONS
Powell said the “substantial further progress test toward inflation” toward inflation has now been met. The Fed has previously said it would keep its easy-money policies in place until inflation was running consistently at 2% and the country has returned to full employment.
Despite the red-hot pace of gross domestic product growth, surging demand has led to high inflation. Consumer prices increased 5.4% in the year ending in July, according to the Department of Labor. The price increases have been hotter than both the Federal Reserve and the Biden administration initially predicted.
Powell, who has consistently predicted that the increase in inflation would be merely transitory and will settle down eventually, reasserted that belief during his Friday speech. He said that it would not be a wise idea for the Fed to try to mitigate the inflationary pressures right now as doing so could backfire.
“Inflation at these levels is, of course, a cause for concern. But that concern is tempered by a number of factors that suggest that these elevated readings are likely to prove temporary,” the chairman said.
Powell also noted that while the United States has made progress on reaching full employment, it has a way to go before that second test for raising interest rates is met.
While jobless claims have declined significantly since the start of the year, which featured new claims hovering over 800,000 per week, the country’s unemployment rate is also much higher than before its pre-pandemic level of 3.5%, and there are fewer people who were employed than in February 2020.
Greg McBride, a chief financial analyst at Bankrate, reacted to Powell’s speech and said that the arrival of August’s economic figures throughout September would provide more clarity about when the central bank may begin tapering.
“Tapering of bond purchases is coming, and coming this year, but we’re not there yet,” he said. “While giving a nod to the significant progress the economy has seen, the delta variant is enough of a near-term risk that Fed Chair Powell feels it is too early to announce any details on tapering bond purchases.”
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The next meeting of the Fed’s top officials, who make the decisions about monetary policy, is scheduled for late September.
