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Economy

Powell sends strong signal Fed could dial back stimulus this year

Central bank chief declares 'clear progress' on US job market in speech at Jackson Hole

U.S. Federal Reserve Chairman Jay Powell says the 'substantial further progress' test has been met for inflation.   © Reuters

NEW YORK (Financial Times) -- Jay Powell has sent his strongest signal yet that the Federal Reserve could start dialing back its massive pandemic-era stimulus program this year, declaring the U.S. central bank had met the first of two goals it wants to achieve before reducing its support and was making "clear progress" on the second.

In a closely watched virtual speech at the Jackson Hole gathering of central bankers on Friday, Powell emphasized the robust economic rebound from the depths of the coronavirus outbreak, and expressed confidence the world's largest economy was on a path that will allow the central bank to begin withdrawing its support.

The central bank has been buying $120 billion of Treasuries and agency mortgage-backed securities each month since the outset of the coronavirus crisis last year, and has pledged to do so until it sees "substantial further progress" on its goals of average 2% inflation and maximum employment.

"My view is that the 'substantial further progress' test has been met for inflation," Powell said on Friday. "There has also been clear progress toward maximum employment."

Minutes from the latest meeting on monetary policy indicated a majority of officials believe it would be appropriate to start "tapering" the bond-buying program this year -- a timeline that Powell endorsed on Friday.

His comments come at a highly uncertain moment for the world's largest economy.

Policymakers and economists alike are scrambling to assess the potential economic damage from a startling surge in COVID-19 cases fueled by the highly transmissible delta strain, which abruptly disrupted the Kansas City Fed's plans to host this year's symposium in person.

Conflicting economic signals have also made it difficult for central bankers to reach a consensus on when exactly the "tapering" process should begin, and at what point these bond purchases should cease altogether.

A growing cohort of central bank officials has pointed to surging U.S. consumer prices, which have been propelled by widespread supply-chain constraints, to build a case that the Fed should end these bond purchases soon if it wants to avoid even higher inflation and financial instability.

Powell has previously acknowledged that inflationary pressures have mounted more quickly and by a larger magnitude than the Fed had initially forecast, and on Friday insisted the central bank would act if needed.

"If sustained higher inflation were to become a serious concern, the Federal Open Market Committee would certainly respond and use our tools to assure that inflation runs at levels that are consistent with our goal," he said.

However, Powell warned against moving prematurely to tackle consumer prices, which the Fed believes to be "transitory" and are most pronounced in a narrow range of sectors sensitive to pandemic-related disruptions.

"If a central bank tightens policy in response to factors that turn out to be temporary, the main policy effects are likely to arrive after the need has passed," he said. "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."

His comments come as more "hawkish" members of the policymaking Federal Open Market Committee call for an announcement on tapering at the Fed's September meeting. They have argued for an end to the program by the second half of next year at the latest.

That would give the Fed the flexibility it needs to raise U.S. interest rates in 2022 if inflation proves more persistent than initially anticipated. The Fed's latest projections, published in June, indicate at least two rate increases are expected in 2023.

But with almost 6 million more Americans out of work than before the pandemic struck, and COVID concerns rising again, another faction of officials has argued that a more patient approach may still be appropriate.

Ahead of Powell's speech, most market participants believed an announcement was likely in November, with tapering beginning in either December or January.

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