September 23, 2021

US Fed chair Jerome Powell hints at tapering of easy money policy by year-end

By Administrator_ India

Capital Sands

The Federal Reserve will start dialing back its ultra-low-rate policies this year as long as hiring continues to improve, Chair Jerome Powell said Friday, signaling the beginning of the end of the Feds extraordinary response to the pandemic recession.

The Fed’s move could lead, over time, to somewhat higher borrowing costs for mortgages, credit cards, and business loans. The Fed has been buying $120 billion a month in mortgage and Treasury bonds to try to hold down longer-term loan rates to spur borrowing and spending. Powell’s comments indicate the Fed will likely announce a reduction or tapering of those purchases sometime in the final three months of this year.

In a speech being given virtually to an annual gathering of central bankers, Powell stressed that the beginning of tapering does not signal any plan to start raising the Feds benchmark short-term rate, which it has kept near zero since the pandemic tore through the economy in March 2020. Rate hikes won’t likely start until the Fed had finished tapering its bond purchases.

But Powell said inflation has risen enough to meet its test of substantial further progress toward the Fed’s goal of 2% annual inflation over time, which was necessary to begin tapering. There have also been clear progress, he said, toward the Fed’s goal of maximum employment.

While the delta variant presents a near-term risk, the prospects are good for continued progress toward maximum employment, Powell said. He spoke via webcast to the Jackson Hole Economic Symposium, an annual conference of central bankers that is being held virtually for a second straight year because of COVID-19.

A sharp jump in inflation has put the Fed’s ultra-low-interest rate policies under growing scrutiny, both in Congress and among households that are being squeezed by surging prices. Inflation, according to the Fed’s preferred gauge, rose 3.6% in July compared with a year earlier, the biggest increase in three decades. The month-to-month increase slowed from 0.5% to 0.3%.

Most Fed officials said at their last meeting in late July that inflation had met their goal of making substantial further progress toward topping 2% for some time. If the economy continued to improve, most officials said it would be appropriate to begin reducing the Fed’s bond purchases later this year, according to minutes from the meeting released last week.

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