Powell confirms Fed may start winding down stimulus measures this year

The chair of the US Federal Reserve has confirmed the central bank could start winding down the wave of stimulus measures it unleashed to dampen the economic impact of the Covid crisis this year.

Jerome Powell said the US economy has reached a point where it no longer needs the same scale of monetary policy support, but reiterated that interest rate hikes are a long way off. However, he did not provide a concrete timeline for scaling back support.

Powell’s remarks indicate the Fed will reduce the scale of assets it purchases each month. The Fed currently buys $120bn of assets each month, consisting of $40bn of mortgage-backed securities and $80bn of US Treasuries.

Powell said: “At the FOMC’s recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year.”

“The intervening month has bought more progress in the form of a strong employment report for July.”

“The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate lift off,” Powell said.

Yields on 10-year Treasuries dropped 0.023 per cent to 1.321 per cent on the news.

Powell said the current federal funds rate – which is near zero – will remain unchanged until the US economy has reached maximum employment and inflation has reached two per cent and is on track to moderately exceed two per cent for some time.

ING analysts said: “Powell merely suggests it “could” be appropriate to begin the taper this year, and the decision-making process involves a delicate balancing act between the data and the spread of the Delta Covid variant.”

The chair highlighted there had be clear progress toward maximum employment, but that the US economy is not there yet, suggesting some monetary support may remain.

Powell also doubled-down on the Fed’s position that current surges in inflation are transitory.

“Longer-term inflation expectations have moved much less than actual inflation or near-term expectations, suggesting that households, businesses, and market participants also believe that current high inflation readings are likely to prove transitory,” he said.

The chair of the central bank delivered the remarks as part of his keynote speech at the Jackson Hole economic symposium today.

A majority of Federal Reserve ratesetters supported a winding down of the central bank’s enormous monetary support unleashed in response to the Covid crisis at the central bank’s latest round of discussions, minutes released this month revealed.

“Looking ahead, most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year,” the minutes said.

Policymakers said they were content with progress on prices and are near enough satisfied with the state of the jobs market.

Latest data shows the unemployment rate in the US dipped 0.5 per cent to 5.4 per cent in July. The American economy added 943,000 in the same month. Meanwhile, US inflation is currently running at 5.4 per cent. A fresh set of payrolls data is scheduled for release next week.

A string of data released recently indicates the US economy’s recovery from the Covid crisis is showing signs of weakness.

Figures released yesterday shows new jobless claims jumped for the first time in five weeks, while US consumer confidence fell to its lowest level in a decade. Meanwhile, a sharp rise in Covid cases driven by the more transmissible Delta variant has weighed on household sentiment.

US stocks reacted positively to Powell’s remarks. The S&P 500 and Dow Jones were up 0.67 per cent and 0.65 per cent respectively in early morning trading on Wall Street.