Powell: Reversing Fed stimulus too early could be 'particularly harmful'

·3 min read

Federal Reserve Chairman Jerome Powell said Friday that the U.S. economic recovery appears to be making progress, but warned that the central bank needs to be careful not to tighten its policy before enough Americans can return to work.

“Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful,” said Powell in remarks delivered at the central bank’s Jackson Hole Economic Symposium.

Powell’s warning hints at a more cautious approach to pulling back on its policy, as some members of the policy-setting Federal Open Market Committee start to call for slowing its asset purchase program — now.

Still, the Fed chairman emphasized that the spread of the Delta variant presents a “near-term risk” to economic growth, but said he remained optimistic about the economic recovery.

Powell specifically called attention to the labor market, where 6 million people remain out of work compared to pre-pandemic levels. Hiring firms have been scrambling to find workers, with a record 10.1 million job openings recorded in June.

He added that the vaccination campaign, schools reopening, and the expiry of extra unemployment insurance will eventually restore a chunk of those unemployed.

“These favorable conditions for job seekers should help the economy cover the considerable remaining ground to reach maximum employment,” Powell said, pointing to wage gains among some corners of the labor market.

But the Fed chairman acknowledged rising inflation, which he described as a “cause for concern.” Data from the Bureau of Economic Analysis showed prices (measured in the Personal Consumption Expenditures Index) rising by 4.2% on a year-over-year basis, a pace not seen in over 30 years.

Powell said he continues to expect high inflation to be “transitory,” expecting factors like unusually high used car prices to come down soon.

“Policy can and should look through temporary swings in inflation,” Powell said at the conference, which was moved to a virtual format this year due to high COVID-19 case levels in Jackson Hole, Wyoming.

Time to taper?

Powell’s commentary comes as the FOMC debates whether or not to begin slowing the pace of its asset purchases. Since the depths of the pandemic, the Fed has been buying about $120 billion a month in U.S. Treasuries and agency mortgage-backed securities to stimulate demand in the economy.

The test for the Fed to start tapering that so-called quantitative easing program has been “substantial further progress” on its dual mandate goals of maximum employment and price stability.

Powell said high inflation readings hit that mark on its price stability mandate. But on employment, Powell said there has been “clear progress,” but suggested he may want to see more data before declaring the labor market ready to handle a Fed taper.

“If the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year,” Powell said, adding that the Delta variant remains a risk.

The Fed will receive another employment report, covering the month of August, next Friday. That will be the last employment print before the central bank’s next policy-setting announcement scheduled for Sept. 22.

On interest rate hikes, the Fed chairman emphasized that the timing of any interest rate hikes are not to be linked to the timing of taper, noting that the Fed still has “much ground to cover” before wanting to raise rates from near-zero.

“We have articulated a different and substantially more stringent test [for liftoff],” Powell said Friday.

Powell said the economy has shown “more progress” since the Fed’s last policy-setting meeting in July, where the Fed held interest rates at near-zero.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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