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Fed chair Powell says he supports starting to taper bond purchases this year

Federal Reserve Chairman Jerome Powell revealed on Friday that he was one of the majority of Fed officials who believe the central bank can “taper” or slow down the pace of its bond purchases this year.

In his closely watched Jackson Hole speech, Powell said “at the FOMC’s recent July meeting, 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.”

This is the first time Powell has given his personal opinion publicly.

“My view is that the ‘substantial further progress’ test has been met for inflation. There has also been clear progress toward maximum employment,” Powell said.

The Fed is buying $80 billion of Treasurys and $40 billion of mortgage-backed securities each month to put downward pressure on long-term interest rates and boost demand in the economy.

In his remarks, Powell was careful not to discuss when the Fed might formally announce the taper. Officials are divided about whether to announce it at their meeting on Sept. 20-21 or wait until November. The Fed chairman also didn’t discuss the pace of the slow down. Here again, officials have differing views.

On these questions, Powell simply said the Fed “will be carefully assessing incoming data and the evolving risks.”

Since the Fed’s July meeting, a strong employment report was released but Powell also noted that there was a further spread of the coronavirus delta variant.

Several Fed officials have pressed for the Fed to announce a tapering of bond purchase in September.

Dallas Fed President Rob Kaplan told MarketWatch on Thursday he wants a taper to start soon and proceed at a gradual pace. That means laying out plans in September. He has been joined by similar remarks by Kansas City Fed President Esther George, St. Louis Fed President James Bullard, Cleveland Fed President Loretta Mester, and Philadelphia Fed President Patrick Harker.

On Friday Atlanta Fed President Raphael Bostic suggested he might want to wait for a few more months.

The Fed has also been holding its benchmark interest rate close to zero since the pandemic first hit the economy in March 2020.

In his remarks, Powell stressed that 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.”

Last year, the Fed adopted a new policy strategy that it would hold interest rates close to zero until the economy reaches “maximum employment” and inflation is on track to moderately exceed 2% for some time.

“We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2% inflation on a sustainable basis,” he said.

Headline inflation is running at a 4.2% annual rate over the past 12 months, raising concern that the Fed could get “behind the curve” on keeping price pressures contained.

Powell said inflation at this level “is a cause for concern.” But he said that this concern is tempered by a number of factors that suggest that elevated inflation readings “are likely to prove temporary.”

The Fed chairman said that the spike in inflation has been caused by a relatively narrow group of goods and services — noting that durable goods alone have contributed about 1 percentage point to headline inflation gains over the past year.

Inflation measures that “trim” out volatile prices generally show inflation close to 2%, he said.

In addition, Powell said he saw no evidence of a “wage-price spiral” that might fuel inflation.

Measures of longer-term inflation expectations suggest that businesses and consumers believe the current high inflation readings are likely to prove transitory, he said.

The Fed’s baseline forecast is that the labor market will continue to improve and inflation will return “to levels consistent with our goal of inflation averaging 2% over time,” he said.

He said that tightening monetary policy now could be a “particularly harmful” mistake.

But if sustained higher inflation were to become a serious concern, the FOMC “would certainly respond,” he said.

U.S. stock indexes
SPX,
+0.88%

COMP,
+1.23%

rose to intraday records Friday morning, after Powell’s speech. The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.307%

slipped to 1.331%.

“For now, it appears that Fed Chair Jay Powell successfully sent a “dovish taper” message to markets, saying he was in favor of tapering this year but emphasizing that rate hikes are not mechanically linked to the end of tapering,” said Terrence Connelly, head of research at Contingent Macro Advisors.

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