Powell signals Fed may start cutting economic support

Eighteen months after the start of the pandemic, Jerome H. Powell offered the clearest sign to date that the Federal Reserve is ready to...


Eighteen months after the start of the pandemic, Jerome H. Powell offered the clearest sign to date that the Federal Reserve is ready to withdraw some of the support it provides to the economy soon as conditions reinforce each other. But the Fed chairman has made it clear that interest rate hikes remain far away and that the central bank is closely monitoring the risks posed by Delta.

The Fed has tried to stimulate economic activity by buying $ 120 billion in government-guaranteed bonds each month, helping to keep many types of borrowing cheap, and officials are actively debating when to start. to slow down these purchases. They said they would like to make “further substantial progress” towards stable inflation and full employment before doing so.

Mr. Powell, who speaks at a closely watched conference the Kansas City Fed hosts each year, used his remarks to explain that he believes the Fed has made sufficient headway on inflation and ” clear progress towards maximum employment “.

The Fed chairman said that, from the political discussion in July, “I was of the opinion, like most of the participants, that if the economy was going broadly as expected, it might be appropriate to start reducing the pace of asset purchases this year. “

But Mr Powell pointed out that the Fed is closely monitoring the risks associated with the Delta variant – which has forced the conference he is speaking to be held online rather than in person in Jackson Hole, Wyoming, stressing the threat it poses not only to the public. health but also to economic activity because it prevents a return to a normal life.

The Fed wants to avoid overreacting to a recent spike in inflation that it says will most likely prove temporary at a time when risks loom, as it could leave workers on the sidelines and undermine the potential for the economy.

“Today, with a substantial slack in the job market and the pandemic continuing, such a mistake could be particularly damaging,” said Powell, after examining the reasons why the central bank expects to that recent rapid price gains fade and low inflation trends abate. to recover.

The Delta variant colors the backdrop against which Mr Powell is speaking: Economists do not know how much this will slow growth, but many fear it will cause consumers and businesses to pull out because it thwarts the market. plans to return to the office and threaten to close schools and daycares. This could lead to a slowdown in the employment recovery at a time when some six million positions are still lacking in relation to employment levels before the pandemic.

Economists believe the central bank could start slowing its bond purchases in November or December, a process commonly referred to as tapering. The early withdrawal would be the central bank’s first step in moving away from the cheap money policies it used to fuel growth and help the economy recover from the blow it suffered at the start of the crisis. pandemic. Fed policymakers have also kept their key interest rate near zero since March 2020, but have signaled that the bar for rate hikes is higher than that for slowing bond purchases.

Mr. Powell clarified that the slowdown in bond purchases does not send a signal that the Fed is ready to raise rates soon.

“We have a long way to go to reach the maximum number of jobs, and time will tell if we have reached 2% inflation on a sustainable basis,” he said.

Mr Powell announced at the Jackson Hole conference last year that policymakers would no longer hike the federal funds rate simply because the labor market was accelerating and inflation was expected to accelerate, as part an overhaul of the The Fed’s policy framework. Officials have since made it clear that they want the job market return to full employment before raising rates from the bottom – a milestone most officials expect to reach by the end of 2023, based on their June economic projections.

“Labor market conditions are improving but are turbulent, and the pandemic continues to threaten not only health and life, but also economic activity,” Powell said Friday.

Central bankers are seeing their patience tested by an unusual set of economic conditions. Government spending in response to the pandemic has helped consumers build up large savings reserves, and they are spending regularly. Strong demand for goods and services has collided with tight supply chains, which have been disrupted by pandemic lockdowns and labor shortages in key industries. These conditions combine with data quirks to push inflation higher, at least temporarily.

The Fed’s preferred price indicator, the Personal Consumption Expenditure Index, climbed 4.2% last month compared to a year earlier, according to Commerce Department data released Friday. The increase was greater than the 4.1% jump predicted by economists in a Bloomberg survey, and the fastest pace since 1991. That’s well above the central bank’s 2% target, which she tries to achieve average over time.

“The rapid reopening of the economy has caused inflation to rise sharply,” said Powell, calling recent readings “well above our longer-term target of 2%.”

Fed policy makers are debating how to interpret the current price spike. Because it comes from categories of goods and services that have obviously been affected by the pandemic and supply chain disruptions, including used cars and airline tickets, most expect what today’s higher inflation fades over time. But some fear the process will take enough time for consumers’ expectations for future inflation to rise, prompting them to demand higher wages and resulting in faster price hikes in the long run.

Other officials fear that it is more likely that today’s high prices will give way to slower gains once the pandemic disruptions are resolved – and the long-term trends that have depressed l inflation for decades, including an aging population, is biting again. They warn that if the Fed overreacts to today’s inflationary surge, it could end up with persistently low inflation, just like Japan and Europe.

Slow price gains seem like good news for anyone buying oat milk and eggs, but it can set off a vicious downward cycle. Interest rates include inflation, so when it slows down, Fed officials have less room to make cheap money to support growth in times of turmoil. This makes it harder for the economy to recover quickly from downturns, and long periods of weak demand push prices further down, creating a cycle of stagnation.

“While the underlying global disinflationary factors are likely to change over time, there is little reason to believe that they have suddenly reversed or subsided,” Mr. Powell said. “It seems more likely that they will continue to weigh on inflation as the pandemic goes down in history.”

He also explained in detail what the Fed is monitoring with regard to prices, noting that inflation has “so far” been coming from a select group of goods and services. Officials are monitoring incoming data to make sure the prices of durable goods like used cars – which recently took off – are slowing and even falling.

Mr Powell said the Fed sees “little evidence” of wage increases that could threaten sustained high inflation. And he stressed that measures of inflation expectations did not reach unwanted levels, but rather staged a “welcome reversal” of their previous unhealthy decline.

Still, his remarks carried a tone of vigilance.

“We would be concerned about signs that inflationary pressures are spreading more widely in the economy,” he said.

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Newsrust - US Top News: Powell signals Fed may start cutting economic support
Powell signals Fed may start cutting economic support
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