Fed chief signals possible change of course
Tapering of the bond-buying program may begin later this year if current trends hold
WASHINGTON — The American recovery appears to be strongly on track despite lingering uncertainty about the surging coronavirus, Federal Reserve Board Chairman Jerome Powell said Friday, adding that continued progress could spur the central bank to start unwinding its support for the U.S. economy later this year.
Powell reasserted his belief that rising inflation will be a temporary feature of the recovery, even as prices rise at a faster clip than many Fed policymakers expected. And Powell said he was optimistic that the labor market would keep gaining momentum, positioning the Fed to ease up its sprawling bond-buying program that has supported the markets through much of the COVID-19 crisis.
Fed leaders have consistently said they need to see “substantial further progress” on inflation and job growth before the central bank starts to pare back its $120 billion a month in asset purchases. For months, economists and Wall Street have been eager for any signs about when or how the Fed will begin to “taper” its sprawling bond-buying program, which helps stimulate the economy and makes borrowing easier by holding down long-term rates.
“My view is that the ‘substantial further progress test’ has been met for inflation,” Powell said in the remarks. “There has also been clear progress toward maximum employment.”
Powell added that at the Fed’s last policy meeting in July, he “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.”
On Friday, he said that “while the delta variant presents a near-term risk, the prospects are good for continued progress toward maximum employment.”
Economic leaders at the Fed and in the Biden administration emphasize that there’s no playbook for this economy and that controlling the pandemic is key to the economy’s sustained recovery. Powell reiterated one of the reasons the Fed hasn’t rushed to tamp down on inflation, which Fed leaders say is a temporary feature of the pandemic economy: wariness of any policies that could slow hiring and undercut peoples’ ability to get back into the labor market.
Some head winds may be beginning to show. On Friday, the Bureau of Economic Analysis reported that while consumer spending remained historically high in July, it increased just 0.3 percent compared to June. All of the increase was due to higher prices — adjusted for inflation, spending actually fell slightly, down 0.1 percent.
The U.S. economy boomed by 943,000 jobs in July, but it’s unclear whether the spread of the delta variant will hold back hiring in August.
Meanwhile, inflation continues to test policymakers at the Fed and in the Biden administration. Supply chain backlogs have collided with a rebound in consumer demand, pushing prices higher, and at a faster clip than expected.
On Friday, data released by the Bureau of Economic Analysis showed prices rose 4.2 percent in July compared to a year ago, and 0.4 percent compared to June.