Powell Says U.S. Entering Faster Growth, Though Virus Spike Remains a Risk

Powell Says U.S. Entering Faster Growth, Though Virus Spike Remains a Risk
  • Oops!
    Something went wrong.
    Please try again later.
Catarina Saraiva and Craig Torres
·4 min read
  • Oops!
    Something went wrong.
    Please try again later.

(Bloomberg) --

The Federal Reserve will likely scale back its bond purchases before considering raising interest rates, Chairman Jerome Powell said, hardening expectations on the sequence of its eventual exit from aggressive policy support.

“We will reach the time at which we will taper asset purchases when we’ve made substantial further progress toward our goals from last December, when we announced that guidance,” Powell said Wednesday in a virtual event hosted by the Economic Club of Washington. “That would in all likelihood be before -- well before -- the time we consider raising interest rates. We haven’t voted on that order but that is the sense of the guidance.”

The appearance was the latest of several by the Fed chair this month, including an interview on CBS’s “60 Minutes” show on Sunday in which he said the economy appears to have turned a corner toward faster growth amid widening vaccinations against Covid-19, but central bankers would not be in a hurry to remove their support.

Policy makers will wait until inflation has reached 2% sustainably and the labor-market recovery is complete before considering lifting interest rates, and the combination is unlikely to happen before 2022, he said. Their forecasts last month signaled rates being held near zero through 2023.

The U.S. central bank enters its traditional blackout period on public comment on Friday night ahead of the April 27-28 meeting of the Federal Open Market Committee.

“When the purchases go to zero, the size of the balance sheet is constant, and when bonds mature you reinvest them,” Powell said. “And then another step -- and we took this late in the day in the last cycle -- was to allow bonds to start to runoff. And we haven’t decided whether to do that or not.”

Powell added that he doesn’t think the Fed would actually sell bonds into the market, something it also didn’t do during the recovery from the 2008 financial crisis.

Fed Vice Chair Richard Clarida made a similar point about the sequencing of the exit strategy in remarks later Wednesday.

“We’re going to reduce the pace of purchases at some point and that would occur prior to any decision about lifting off,” he said in response to question during a virtual event hosted by the Shadow Open Market Committee. Noting that he has a “very robust” baseline outlook for U.S. growth in 2021 that could be the fastest in 35 years, Clarida added that policy makers were not going to act on a forecast.

“This is going to be outcome based. We’re going to be looking at the labor market indicators and the inflation data as it comes in,” he said.

Patience Pledged

Powell and his colleagues have pledged to be patient and maintain aggressive monetary policy support, even as the economic recovery from the pandemic picks up speed. That dovish view has helped U.S. stocks reach fresh record highs. Recent data has also painted a brighter picture as vaccinations spread and the economy reopens, with employers adding 916,000 jobs in March.

“Most members of the committee did not see raising interest rates until 2024, but that isn’t a committee forecast, it isn’t something we vote on or or act on as a group -- it really is just our assessment,” Powell said. “Markets focus too much on what we call the economic predictions, and I would focus more on on the outcomes that we’ve described.”

Fed policy makers substantially lifted their growth and employment forecasts at the central bank’s meeting last month. Their median estimate sees the economy expanding 6.5% this year and the unemployment rate declining to 4.5% by the end of 2021.

Powell said the U.S. is going into a period of faster growth and job creation, and that the main risk is another spike in Covid-19 cases due to virus strains that may be more difficult to treat.

Minutes of the central bank’s March meeting released April 7 said policy makers expect it will likely be “some time until substantial further progress” was made on employment and inflation. That refers to the threshold they’ve set for scaling back bond purchases of $120 billion a month.

(Updates with comments from Clarida in ninth paragraph.)

For more articles like this, please visit us at bloomberg.com

Subscribe now to stay ahead with the most trusted business news source.

©2021 Bloomberg L.P.