Powell: Fed could slow bond purchases this year
Eighteen months into the pandemic, Jerome Powell offered the clearest sign yet that the Federal Reserve is prepared to soon withdraw one leg of the support it has been providing to the economy as conditions strengthen. But the Fed chair made clear that interest rate increases remain far away, and that the central bank is closely watching risks posed by the delta variant of the coronavirus.
The Fed has been trying to bolster economic activity by buying $120 billion in government-backed bonds each month, helping to keep many kinds of borrowing cheap, and officials are actively debating when to begin slowing those purchases. They have said they would like to make “substantial further progress” toward stable inflation and full employment before doing so.
Powell, who is speaking at a closely watched conference that the Kansas City Fed hosts each year, used his remarks to explain that he thinks the Fed has made sufficient progress when it comes to inflation, and “clear progress toward maximum employment.”
The Fed chair said that, as of July’s policy discussion, “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.”
But Powell underlined that the Fed is closely watching risks tied to the delta variant — which forced the conference he is speaking at to be held online instead of in-person in Jackson Hole, Wyo., underscoring the threat it poses not only to public health but also to economic activity as it prevents a return to normal life.
The Fed wants to avoid overreacting to a recent burst in inflation that it believes will most likely prove temporary at a time when risks loom, because doing so could leave workers on the sidelines and eat into the economy’s potential.
“Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful,” Powell said, after ticking through reasons the central bank expects recent rapid price gains to fade and low-inflation trends to return.
The delta variant is coloring the backdrop Powell is speaking against: Economists are not sure how much it is going to slow growth, but many are worried that it could cause consumers and businesses to pull back as it foils return-to-office plans and threatens to shut down schools and child care centers. That could lead to a slower jobs rebound at a time when some 6 million positions are still missing compared with employment levels before the pandemic.
Economists think that the central bank could begin to slow its bond-buying in November or December, a process that is commonly called tapering. The anticipated pullback would be the central bank’s first step away from the cheap-money policies it has been using to stoke growth and help the economy to recover from the hit it took at the start of the pandemic. Fed policymakers have also held their interest rate at near zero since March 2020, but they have signaled that the bar for lifting rates is higher than that for slowing bond purchases.
Powell made clear that slowing bond purchases does not send a signal that the Fed is prepared to raise rates soon.
“We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis,” he said.
Powell announced at the Jackson Hole conference last year that policymakers would no longer lift the federal funds rate just because the labor market was speeding up and inflation was expected to accelerate, part of a revamp of the Fed’s policy framework. Officials have since made clear that they want the job market to return to full employment before raising rates from rock bottom — a milestone most officials expect to achieve by the end of 2023, based on their June economic projections.
“Labor market conditions are improving but turbulent, and the pandemic continues to threaten not only health and life, but also economic activity,” Powell said Friday.
Central bankers are having their patience tested by an unusual set of economic conditions. Government spending in response to the pandemic has helped consumers amass large savings stockpiles, and they have been spending steadily. Hot demand for goods and services has clashed with constrained supply chains, which have been disrupted by pandemic lockdowns and labor shortages in key industries.
Those conditions are combining with data quirks to push inflation higher, at least temporarily.
“While the underlying global disinflationary factors are likely to evolve over time, there is little reason to think that they have suddenly reversed or abated,” Powell said. “It seems more likely that they will continue to weigh on inflation as the pandemic passes into history.”
He also offered a detailed explanation of what the Fed is watching when it comes to prices, emphasizing that inflation is “so far” coming from a narrow group of goods and services. Officials are keeping an eye on incoming data to make sure prices for durable goods like used cars — which have recently taken off — slow and even fall.
Powell said the Fed sees “little evidence” of wage increases that may threaten high and lasting inflation. And he pointed out that measures of inflation expectations have not climbed to unwanted levels, but have instead staged a “welcome reversal” of their previous unhealthy decline.
Still, his remarks carried a tone of watchfulness.
“We would be concerned at signs that inflationary pressures were spreading more broadly through the economy,” he said.