Federal Reserve Chairman Jerome Powell indicated Friday that the central bank is likely to begin withdrawing some of its easy-money policies before the end of the year, though he still sees interest rate hikes off in the distance.
In a much-anticipated speech as part of the Fed’s annual Jackson Hole, Wyoming, symposium, Powell said the economy has reached a point where it no longer needs as much policy support.
That means the Fed likely will begin cutting the amount of bonds it buys each month before the end of the year, so long as economic progress continues. Based on statements from other central bank officials, a tapering announcement could come as soon as the Fed’s Sept. 21-22 meeting.
However, it does not mean that rate increases are looming.
“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 in prepared remarks for the virtual summit.
He added that while inflation is solidly around the Fed’s 2% target rate, “we have much ground to cover to reach maximum employment,” which is the second prong of the central bank’s dual mandate and necessary before rate hikes happen.
Markets reacted positively to Powell’s comments, sending major stock indexes to record highs while government bond yields moved lower.
Later in the day, Fed Vice Chairman Richard Clarida said he agrees with Powell’s remarks and expects tapering to being this year so long as the pace of labor gains continues, though neither official set a specific date for when the process will begin.
“I think that if that materializes, then I would support commencing a reduction in the pace of our purchases later this year,” Clarida told CNBC.
Powell also devoted an extensive passage in the speech to explaining why he continues to think the current inflation rise is transitory and will drop eventually to the target level.
The Fed has used the term “substantial further progress” as a benchmark for when it will start tightening policy. Powell said that “test has been met” for inflation while there “has also been clear progress toward maximum employment.” He said he and his fellow officials agreed at the July Federal Open Market Committee meeting that “it could be appropriate to start reducing the pace of asset purchases this year.”
That question over “tapering” of the minimum $120 billion of monthly bond purchases has had the market’s attention as much for what it means on a mechanical level as for what it signifies when the Fed will start hiking rates.
In an effort to resuscitate the economy during the early days of the Covid-19 pandemic, the Fed took its benchmark rate down to near zero and accelerated its bond buying, or quantitative easing, program to where its balance sheet is now at nearly $8.4 trillion, about double where it was in March 2020.
At last year’s Jackson Hole summit, also held virtually,…
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