Fed’s Powell gives no signal on start of bond-buying taper, weighs Delta risks

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August 27, 2021 9:51 PM

On the potentially imminent decision by the U.S. central bank to begin reducing its $120 billion in monthly purchases of U.S. Treasuries and mortgage-backed securities, Powell said he agreed with the majority of his colleagues that a bond "taper" could be appropriate "this year."

Fed Chair Jerome PowellFed Chair Jerome Powell. (Photo Credit: AP)

The U.S. economy continues to make progress towards the Federal Reserve’s benchmarks for reducing its pandemic-era emergency programs, Fed Chair Jerome Powell said on Friday in remarks that defended the view current high inflation will likely pass and stopped short of signaling the timing for any reduction in the central bank’s asset purchases beyond “this year.”

In a speech to the annual Jackson Hole economic conference, Powell indicated the Fed will remain cautious in any eventual decision to raise interest rates as it tries to nurse the economy to full employment, saying he wants to avoid chasing “transitory” inflation and potentially discouraging job growth in the process – a defense in effect of the new approach to Fed policy he introduced a year ago.

On the potentially imminent decision by the U.S. central bank to begin reducing its $120 billion in monthly purchases of U.S. Treasuries and mortgage-backed securities, Powell said he agreed with the majority of his colleagues that a bond “taper” could be appropriate “this year.”

The weeks since the Fed’s policy meeting in July “brought more progress” towards repairing the jobs market, with nearly a million positions added, and that progress should continue.

But it also coincided with “the further spread of the Delta variant” of the coronavirus and its attendant risks, Powell noted.

In the days before Powell’s speech, several Fed regional bank presidents said they were eager to get a taper underway, and to run down the asset purchases fast.

Powell was non-committal.

“We will be carefully assessing incoming data and the evolving risks,” he said, signaling that Fed discussions about exactly when to reduce the bond-buying program not only remain unresolved, but must be squared against the health and economic risks posed by the highly contagious Delta variant.

Stocks gained ground after the release of the text of Powell’s speech, with the benchmark S&P 500 index hitting a record high, as investors took the view that Powell was signaling no rush to tighten policy. Treasury bond yields edged lower and the dollar weakened against a basket of trading-partner currencies.

“Powell understands that tapering will happen, but it’s not going to happen sooner than later,” said Kim Forrest, chief investment officer at Bokeh Capital Partners in Pittsburgh.

‘PREPARED TO ADJUST’

Fed officials have largely said they expect the resurgent health crisis will not throw the recovery off track. But concerns about COVID-19 risks forced the central bank itself to move its Jackson Hole symposium from a mountain resort in Wyoming to a virtual event for the second year in a row.

Expectations for continued job growth are in part based on reopened schools, eased childcare constraints, and a steady return to consumer spending on close-contact activities – developments that may be influenced by the worsening outbreak.

Fed officials “expect to see continued strong job creation.

And we will be learning more about the Delta variant’s effects,” Powell said in his remarks. “For now, I believe that policy is well positioned; as always, we are prepared to adjust.” Much of Powell’s speech was devoted to an exposition of why he feels current high inflation is likely to pass, reciting a list of factors, from supply chain bottlenecks that are likely to ease to globalization acting as an anchor on prices.

While the current fast pace of price increases is “a cause for concern,” it would also be damaging, he said, if the Fed jumps the gun with any policy shift and particularly with a premature decision to raise the central bank’s benchmark overnight interest rate from the current near-zero level.

“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,” Powell said.

“If a central bank tightens policy in response to factors that turn out to be temporary … the ill-timed policy move unnecessarily slows hiring and other economic activity and pushes inflation lower than desired. Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful.”

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