Powell continued to reassure the market, saying that raising rates too early could be "very harmful"

In a speech at the long-awaited Jackson Hole Economic Symposium on Friday, Federal Reserve Chairman Jerome Powell hinted that he may begin to reduce his $120 billion monthly bond purchase incentive later this year and said the central bank has made clear progress in controlling inflation and achieving maximum employment.

"We will continue to purchase assets at the current pace, while I believe inflation is consistent with our forecasts. At the most recent FOMC meeting in July, I, like most participants, believed that if the economy was to continue to grow as expected, it would be appropriate to slow the pace of asset purchases beginning this year. Delta variants are a concern, and we will carefully evaluate the data currently collected and the new risk factors that emerge, and make new trade-offs."

Powell's speech was as cautious as ever. For the few speeches so far, Powell paved the way for "balance sheet reduction". He painted a rather optimistic picture for the US economy while reviewing the continued threat of the epidemic. As well as being reassured about inflation data, he reiterated that inflation, although high, is temporary. As for the key interest rate, since there is still "a long way to go" before the economy reaches full employment, raising interest rates is not imminent.

Gregori Volokhine, president of Meeschaert Financial Services, told BFM Business that "Powell's intention is very clear and he has not given an exact date for the time being, which is also what the market likes."

U.S. stocks rose after Powell's comments, with the S&P 500 and Nasdaq hitting record closing highs for the fourth time this week.

But Powell still left room for possible follow-up actions, emphasizing that "if inflation continues to rise and becomes a serious problem, the Fed will "certainly respond."

In his speech, Powell deliberately mentioned that the timing and progress of the balance sheet reduction cannot directly reflect the possibility of interest rate hikes in order to calm the market. He wanted to hint to investors that the balance sheet reduction is not related to the interest rate hike itself. The purpose of this move is also to provide support for the smooth progress of the balance sheet reduction. In order to emphasize the risk of no interest rate hike in the short term, he also added that raising interest rates too early to deal with transitional high inflation could be "very harmful."

The Fed has always used two main weapons to deal with economic problems: policy interest rate (raising/lowering) and asset purchase programs (expanding/contracting the balance sheet). Rising interest rates (raising interest rates) will push companies and households to reduce debt (thereby limiting demand and curbing the continued rise in commodity prices). But at the recent Fed meeting, this option did not seem to be on the table, although as some central banks have begun to raise policy rates (the Bank of Korea chose to start raising interest rates amid soaring real estate prices), pressure to raise interest rates has gradually built up.

The Fed's second main weapon is to adjust its asset purchase policy. By reducing repurchases, it can reduce the stimulus to the economy and avoid overheating of the financial environment. Powell will announce the exact time for the reduction of the balance sheet and the next phase of policy at the next Monetary Policy Committee meeting on September 21 and 22.