Powell signals Fed may start cutting economic support
Eighteen months after the start of the pandemic, Jerome H. Powell, Chairman of the Federal Reserve, offered the strongest sign yet that the Fed is ready to soon withdraw some of the support it has provided to economy as conditions strengthen.
At the same time, Mr Powell clarified on Friday that interest rate hikes remain far away and that the central bank is monitoring the risks posed by the Delta variant of the coronavirus.
The Fed has tried to stimulate economic activity by buying $ 120 billion in government-guaranteed bonds each month and leaving its key rate low. Officials debated when to start slowing down their bond purchases, the first step towards a more normal policy environment. They said they would like to make “further substantial progress” towards stable inflation and full employment before doing so.
Mr. Powell, speaking at a closely watched conference that the Kansas City Fed holds each year, used his remarks to explain that he thinks the Fed has passed that inflation test and is making “clear progress toward maximum employment.”
At the last Fed meeting in July, “I was of the opinion, like most participants, that if the economy was going broadly as expected, it might be appropriate to start reducing the pace of purchasing. active this year, ”he said.
But the Fed is navigating a set of tough economic conditions. Growth has picked up and inflation is rising as consumers, full of stimulus cash, seek to spend and businesses struggle to meet that demand amid pandemic supply disruptions. Yet there are nearly six million fewer jobs than before the pandemic. And the Delta variant could set consumers and businesses back as it thwarts plans to return to the office and threatens to shut down schools and daycares. This could lead to a slower recovery in employment.
Mr Powell has made it clear that the Fed wants to avoid overreacting to a recent spike in inflation which it believes will most likely be temporary, as it could leave workers on the sidelines and weaken growth prematurely. While the Fed may start to withdraw some of its support, he stressed that the slowdown in bond purchases did not indicate the Fed was ready to raise rates.
“We have a long way to go to achieve maximum jobs, and time will tell if we have reached 2% inflation on a sustainable basis,” he said in his speech at the conference, which held online instead of her usual venue – Jackson Hole. in Wyoming – because of the latest wave of coronavirus.
The distinction he drew – between buying bonds, which keeps financial markets on their toes, and rates, which are the Fed’s most traditional and arguably most powerful tool for keeping money. cheap and strong demand – sent an important signal that the Fed will be careful to let the economy heal more completely before it really puts its monetary tools away, economists said.
“He is trying to reassure, in a time of extraordinary uncertainty,” said Diane Swonk, chief economist at the accounting firm Grant Thornton. “The bottom line is: we’re not going to stifle a recovery. We’re not going to shut it down too soon.
Shares rose on Friday, with gains accelerating after the publication of Mr Powell’s comments and investors realizing that a rate hike was not in sight.
Richard H. Clarida, vice chairman of the Fed, endorsed Mr Powell’s approach, saying in an interview with CNBC that if the labor market continued to strengthen, “I would also support the start of a reduction in the labor market. pace of our purchases later this year. “
Some Fed policymakers have called on the central bank to slow down its purchasing soon and move quickly to end it altogether.
Raphael Bostic, Chairman of the Atlanta Federal Reserve, told CNBC Friday that he supported the liquidation of purchases “as quickly as possible”.
“Let’s start the cone and do it quickly,” he said. “Let’s not let this linger.”
James Bullard, chairman of the Federal Reserve Bank of St. Louis, said on Friday that the central bank is expected to complete its withdrawal by the end of the first quarter of next year. If inflation then starts to moderate, the country will be in “excellent shape,” Bullard told Fox Business.
“If that doesn’t subside, then I think the Fed is going to have to be more aggressive in 2022,” he said.
Central bankers are trying to avoid the mistakes of the last expansion, when they raised interest rates as unemployment fell to fight inflation – only to then watch price gains stagnate at uncomfortably low levels, suggesting that they had withdrawn their support too soon. Mr Powell ushered in a new political framework at last year’s Jackson Hole rally that dictates a more patient approach, which could guard against a similar overreaction.
But as Mr Bullard’s comments reflected, officials could see their patience tested as inflation soars.
The Fed’s favorite price indicator, the Personal Consumption Expenditure Index, rose 4.2% last month from a year earlier, according to Commerce Department data released on Friday. The increase was above the 4.1% jump forecast by economists from a Bloomberg survey, and the fastest pace since 1991. That’s well above the central bank’s 2% target, that it tries to achieve on average over time.
“The rapid reopening of the economy has resulted in a sharp rise in inflation,” Mr. Powell said.
Fed policy makers are debating how to interpret the current price spike. Because it comes from categories of goods and services that have been impacted by the pandemic and supply chain disruptions, including used cars and airline tickets, most expect as inflation decreases. But some fear the process will take enough time for consumer inflation expectations to rise, prompting workers to demand higher wages and leading to faster price hikes in the long run.
Other officials fear that today’s high prices are more likely to give way to slower gains once pandemic disruptions are resolved – and the long-term trends that have driven inflation down for decades, including an aging population, bite 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.
White House economists sided with Powell’s interpretation in a new set of forecasts released on Friday. In his mid-term review of the administration Estimates, the Bureau of Management and Budget said it expects the consumer price index inflation rate to reach 4.8 percent for the year. This is more than double the administration’s initial forecast of 2.1%.
The forecast was an admission of sorts that prices had risen and that the increase had held up longer than administration officials had originally anticipated. But they still insist it will be short-lived and forecast inflation to drop to 2.5% in 2022. The White House has also revised its growth forecast for the year, to 7.1%. against 5.2%.
Slow price gains seem like good news for anyone buying oat milk and eggs, but they 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 abated,” said Powell. “It seems more likely that they will continue to weigh on inflation as the pandemic goes down in history.”
Mr Powell provided a detailed explanation of the Fed’s scrutiny of prices, noting that inflation has “so far” been coming from a select group of goods and services. Authorities are monitoring the 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 had seen “little evidence” of wage increases that could threaten sustained high inflation. And he stressed that measures of inflation expectations had not reached undesirable levels, but rather staged a “welcome reversal” of an 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.
Jim Tankersley contributed reports.