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The Fed is about to wind down its emergency economic stimulus, Jerome Powell hints

The Fed is about to wind down its emergency economic stimulus, Jerome Powell hints

New York (CNN Business)Federal Reserve Chairman Jerome Powell Friday said that inflation is more or less under control, the economic recovery is continuing apace and it’s time for the Fed to wind down its emergency economic stimulus program. But in his highly anticipated speech at the virtual Jackson Hole Symposium, Powell tempered his optimism with some words of caution: The Delta variant remains a looming threat to the US economy.

Balancing the threat of Covid with the ongoing economic recovery, Powell suggested the Fed, which has been buying $120 billion worth of Treasury and mortgage-backed securities every month since the height of the pandemic to support the economy, will start pumping the brakes on those asset purchases before the end of the year.

Interest rates are still near zero as well, though they won’t move until the monthly asset purchases are addressed.

    At Jackson Hole, Powell pointed at the progress the economy had made since last year’s recession. The Fed, which is tasked with holding prices stable and achieving maximum employment, was looking for more progress on both those fronts in the past months before changing its policy.

      But on Friday, Powell said that the test for inflation has now been met and that “has also been clear progress toward maximum employment.”

          “The pace of total hiring is faster than at any time in the recorded data before the pandemic,” Powell said. “These favorable conditions for job seekers should help the economy cover the considerable remaining ground to reach maximum employment.”

          Earlier Friday, the Fed’s preferred measure of inflation — the PCE price index — hit a 30-year high, well above the bank’s target around 2%. Powell has long said that the inflation spike will only be temporary and dissipate as pandemic conditions ease.

          But that still doesn’t mean the money taps will be turned off right away.

          “For now, I believe that policy is well positioned,” Powell said. He also stressed that a reduction to the monthly shopping spree wouldn’t be a direct signal to raise interest rates.

          The minutes from the Fed’s July meeting showed most central bank officials believed that the monthly asset purchases could be rolled back later this year if the economy keeps going at its current pace.

          “The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the Delta variant,” Powell said.

          Rising Covid-19 cases on the back of the more infectious Delta variant have been weighing on some economic indicators recently.

          No taper tantrum

          Financial markets shrugged off Powell’s foreshadowing of a tapering.

          Wall Street was in the green, with all three major stock indexes adding to modest gains as he spoke.

          The yield on the 10-year Treasury bond was also little changed as the symposium got underway, down 0.02% at 1.33%.

            Investors remain somewhat on edge about the eventual tapering announcement: The last time the Fed rolled back its monthly purchases in 2013, the market fell into a so-called “taper tantrum”, characterized by a steep rise in bond yields in just a matter of months.

            Prior to the Jackson Hole speech, investors broadly agreed that the Fed wouldn’t officially announce a reduction of its monthly buys until the fall or winter meetings.