Powell: Fed may start reducing bond purchases this year but will not rush to raise rates

Powell said in prepared video remarks on Friday that inflation had made “substantial further progress” toward the Fed’s goal, which he and other Fed officials say is a prerequisite for tapering bond purchases. In addition, Powell said there had been “clear progress” in the labor market.

At the Federal Reserve's most recent monetary policy meeting, Powell said, "Like most participants, I believe that if the economy develops roughly as expected, it may be appropriate to begin tapering later this year."

Powell said, "The economy has made more progress since the last meeting, with strong employment data in July, but the Delta strain is also spreading further. We will carefully evaluate the incoming data and changes in risks."

Timing of rate hikes

Investors reacted calmly to Powell's information on tapering, and the S&P 500 rose during Powell's speech, rising more than 0.6% from its opening point. The 10-year Treasury yield fell slightly to 1.33%. The dollar fell.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said: "Powell's speech at the Jackson Hole conference strictly followed the prepared text, and those who hoped to find a timetable for tapering will be disappointed."

At the July Federal Open Market Committee meeting, most Fed officials believed it might be appropriate to reduce the $120 billion in monthly bond purchases by the end of the year, according to the minutes, with some participants calling for action as early as next month.

Monetary policy makers want to complete the tapering process before raising interest rates, and in June several officials believed that a rate hike might be needed as early as early 2022.

Powell warned that the start of tapering should not be seen as a signal that rate hikes will be imminent.

Powell said, "The timing and pace of reducing asset purchases will not directly signal the timing of the first rate hike, and for rate hikes, we have said we have a different, much more rigorous set of criteria."

"We have said that we will maintain the target range for the federal funds rate at its current level until the economy has reached levels consistent with full employment and inflation has reached 2 percent and is on track to moderately exceed 2 percent for some time," Powell said. "We still have a lot of work to do to achieve full employment, and it will take time to see whether inflation can sustainably reach 2 percent."

Quarterly forecasts released in June showed that seven of the 18 monetary policy committee members believed it would be appropriate to start raising interest rates next year, while 13 believed that interest rates should be raised before 2023.

Total U.S. employment remains about 6 million below pre-pandemic levels. June and July are peak hiring seasons as restrictions on the service sector are lifted across the country, but the recent spread of the coronavirus strain has added uncertainty to the outlook for the coming months.

Powell stuck to the central bank's consistent message that the current high inflation may only be temporary. He emphasized that the recent price increases were mainly due to some goods and service industries directly affected by the epidemic and economic restart, and it is expected that this impact will gradually diminish.

He pointed out that inflation expectation indicators showed that consumers, businesses and investors also agreed with the expectation that high inflation would not last long, and he stressed that once the epidemic is over, the downward inflation pressure that has emerged in the past decade may reappear.

“While the underlying downward pressure on global inflation may change over time, there is no reason to think they will suddenly reverse or weaken,” Powell said. “It seems more likely that these factors will continue to weigh on inflation as the pandemic passes.”

Bloomberg has the exclusive copyright to this article. Please do not reprint or use it for other commercial purposes without permission. Otherwise, legal liability will be pursued.