Powell: Fed on track to slow down aid to economy later this year | New
WASHINGTON – The Federal Reserve will start cutting its ultra-low rate policies this year as long as hiring continues to improve, President Jerome Powell said on Friday, marking the beginning of the end of the Fed’s extraordinary response to the crisis. pandemic recession.
The Fed’s move could lead to somewhat higher borrowing costs for mortgages, credit cards and business loans over time. The Fed bought $ 120 billion a month in mortgage and treasury bonds in an attempt to hold down long-term lending rates in order to stimulate borrowing and spending. Powell’s comments indicate that the Fed will likely announce a reduction – or “tapering” – of those purchases in the last three months of this year.
In a speech virtually delivered to an annual gathering of central bankers and academics, Powell pointed out that the start of the cut signals no plan to start raising the Fed’s short-term benchmark rate, which it has maintained. close to zero since the pandemic ravaged the economy in March 2020. Rate hikes likely won’t start until the Fed finishes cutting its bond purchases.
But Powell said inflation has risen enough to meet his test of “substantial further progress” towards the Fed’s target of 2% annual inflation over time, which was necessary to start declining. There has also been “clear progress,” he said, towards the Fed’s goal of maximum jobs.
At the same time, the Fed chairman said the central bank is monitoring the economic impact of the highly contagious delta variant, which has caused a sharp increase in COVID-19 cases in the United States, particularly in the South. and the West.
“While the delta variant presents a short-term risk, the outlook is good for continued progression to maximum employment,” said Powell. He spoke via a webcast at the Jackson Hole Economic Symposium, which is being held for virtually a second year in a row due to COVID-19.
Investors on Wall Street appeared to welcome Powell’s message of a gradual withdrawal of the Fed’s economic support from this year and his view that rising inflationary pressures will likely prove temporary. The Dow Jones Industrial Average rose 225 points, or 0.6%, shortly after Powell’s intervention.
The sharp rise in inflation has placed the Fed’s ultra-low interest rate policies under increasing scrutiny, both in Congress and among ordinary households who are squeezed by soaring prices. Inflation, according to the Fed’s preferred gauge, rose 3.6% in July from a year earlier, the largest increase in three decades. The month-over-month increase slowed from 0.5% to 0.3%.
In his speech, Powell underscored his long-held belief that while inflation has risen, causing hardship for millions of Americans, price acceleration is expected to subside once the economy normalizes further after the pandemic and supply shortages have subsided. History, he said, suggests that the Fed should not overreact to temporary price spikes by canceling support for the economy too aggressively. This could weaken job growth.
If the Fed cuts its stimulus “in response to factors that prove to be temporary,” said the Fed chairman, “the untimely policy decision is needlessly slowing hiring and other economic activity and pushing inflation lower than desired “.
Powell also noted that while average wages have risen, they have not risen enough to raise fears of a “wage-price spiral,” as happened during the very high-inflation 1970s.
“Today,” he said, “we see little evidence of wage increases that could threaten excessive inflation.”
If anything, Powell said, the factors that helped keep inflation very low for years before the pandemic – the growth of online retail, the lower-cost products coming from abroad, slowing population growth – could reappear as the pandemic subsides.
Most Fed officials said at their last meeting in late July that inflation had hit their target of “making substantial further progress” to exceed 2% for a while. If the economy continues to improve, most officials said it would be appropriate to start cutting Fed bond purchases later this year, according to the meeting minutes released last week.
To complicate matters, the resurgence of the pandemic, led by the delta variant, belied the Fed’s expectations that the economy and labor market would be clearly on track for improvement by this fall. The delta variant could slow spending in areas such as air travel, dining out, and entertainment.
In his remarks Friday, Powell offered no specific timeline for the Fed to start slowing its bond purchases. Many economists say that one or two more solid monthly jobs reports would likely trigger the start of a pullback before the end of the year.
“Even though we see another big gain in paid employment in August, we suspect the threat of the Delta variant means the majority of officials will want to wait until the November meeting to give the green light,” said Paul Ashworth, Chief Economist of the United States at Capital Economics.
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