Powell Signals Fed Could Start Removing Economic Support
The Fed chair warned that the Delta variant remains a risk and suggested that a rate increase was not on the table for some time.
‘Vigorous But Uneven Recovery’: Powell Says of the Economy
Speaking virtually at an annual conference, Jerome H. Powell, the Federal Reserve chair, said the economy has made significant gains and that the Fed has made sufficient progress in forestalling inflation.
Seventeen months have passed since the U.S. economy faced the full force of the Covid-19 pandemic. This shock led to an immediate and unprecedented decline as large parts of the economy were shuttered to contain the spread of the disease. Strong policy support has fueled a vigorous but uneven recovery, one that is in many respects historically anomalous. The committee remains steadfast in our oft-expressed commitment to support the economy for as long as is needed to achieve a full recovery. The changes we made last year to our monetary policy framework are well-suited to address today’s challenges. We have said that we would continue our asset purchases at the current pace, until we see substantial further progress toward our maximum employment and price stability goals, measured since last December when we first articulated this guidance. Despite today’s challenges, the economy is on a path to just such a labor market, with high levels of employment and participation, broadly shared wage gains and inflation running close to our price stability goal.
Speaking virtually at an annual conference, Jerome H. Powell, the Federal Reserve chair, said the economy has made significant gains and that the Fed has made sufficient progress in forestalling inflation.CreditCredit…Kevin Lamarque/Reuters
Eighteen months into the pandemic, Jerome H. Powell offered the clearest sign yet that the Federal Reserve is prepared to soon withdraw one leg of the support it’s been providing to the economy as conditions strengthen. But the Fed chair made clear that interest rate increases remain far away, and that the central bank is closely watching risks posed by Delta.
The Fed has been trying to bolster economic activity by buying $120 billion in government-backed bonds each month, helping to keep many kinds of borrowing cheap, and officials are actively debating when to begin slowing those purchases. They have said they would like to make “substantial further progress” toward stable inflation and full employment before doing so.
Mr. Powell, who is speaking at a closely watched conference that the Kansas City Fed hosts each year, used his remarks to explain that he thinks the Fed has made sufficient progress when it comes to inflation, and “clear progress toward maximum employment.”
The Fed chair said that, as of July’s policy discussion, “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.”
But Mr. Powell underlined that the Fed is closely watching risks tied to the Delta variant — which forced the conference he is speaking at to be held online instead of in-person in Jackson Hole in Wyoming, underscoring the threat it poses not only to public health but also to economic activity as it prevents a return to normal life.
The Fed wants to avoid overreacting to a recent burst in inflation that it believes will most likely prove temporary at a time when risks loom, because doing so could leave workers on the sidelines and eat into the economy’s potential.
“Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful,” Mr. Powell said, after ticking through reasons the central bank expects recent rapid price gains to fade and low-inflation trends to return.
The Delta variant is coloring the backdrop Mr. Powell is speaking against: Economists are not sure how much it is going to slow growth, but many are worried that it could cause consumers and businesses to pull back as it foils return-to-office plans and threatens to shut down schools and child care centers. That could lead to a slower jobs rebound at a time when some six million positions are still missing compared with employment levels before the pandemic.
Economists think that the central bank could begin to slow its bond-buying in November or December, a process that is commonly called tapering. The anticipated pullback would be the central bank’s first step away from the cheap-money policies it has been using to stoke growth and help the economy to recover from the hit it took at the start of the pandemic. Fed policymakers have also held their policy interest rate at near zero since March 2020, but they have signaled that the bar for lifting rates is higher than that for slowing bond purchases.
Mr. Powell made clear that slowing bond purchases does not send a signal that the Fed is prepared to raise rates soon.
“We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis,” he said.
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Mr. Powell announced at the Jackson Hole conference last year that policymakers would no longer lift the federal funds rate just because the labor market was speeding up and inflation was expected to accelerate, part of a revamp of the Fed’s policy framework. Officials have since made clear that they want the job market to return to full employment before raising rates from rock bottom — a milestone most officials expect to achieve by the end of 2023, based on their June economic projections.
“Labor market conditions are improving but turbulent, and the pandemic continues to threaten not only health and life, but also economic activity,” Mr. Powell said on Friday.
Central bankers are having their patience tested by an unusual set of economic conditions. Government spending in response to the pandemic has helped consumers to amass large savings stockpiles, and they have been spending steadily. Hot demand for goods and services has clashed with constrained supply chains, which have been disrupted by pandemic lockdowns and labor shortages in key industries. Those conditions are combining with data quirks to push inflation higher, at least temporarily.
The Fed’s preferred price gauge, the personal consumption expenditures index, climbed by 4.2 percent last month compared with a year earlier, according to Commerce Department data released on Friday. The increase was higher than the 4.1 percent jump that economists in a Bloomberg survey had projected, and the fastest pace since 1991. That is far higher than the central bank’s 2 percent target, which it tries to hit on average over time.
“The rapid reopening of the economy has brought a sharp run-up in inflation,” Mr. Powell said, calling the recent readings “well above our 2 percent longer-run objective.”
A shuttered storefront in New York last week. Economists are not sure how much the Delta variant will slow growth, but many are worried that it could cause consumers and businesses to pull back.Credit…Gabriela Bhaskar/The New York Times
Policymakers at the Fed are debating how to interpret the current price burst. Because it has come from categories of goods and services that have obviously been affected by the pandemic and supply chain disruptions, including used cars and airplane tickets, most expect today’s hotter inflation to fade with time. But some worry that the process will take long enough that consumers’ expectations for future inflation will move up, prompting them to demand higher wages and leading to faster price gains in the longer run.
Other officials worry that it is more likely that today’s hot prices will give way to slower gains once pandemic-related disruptions are resolved — and that long-run trends that have dragged inflation lower for decades, including population aging, will once again bite. They warn that if the Fed overreacts to today’s inflationary burst, it could wind up with permanently weak inflation, much as Japan and Europe have.
Slow price gains sound like good news to anyone who buys oat milk and eggs, but it can set off a vicious downward cycle. Interest rates include inflation, so when it slows, Fed officials have less room to make money cheap to bolster growth during times of trouble. That makes it harder for the economy to recover quickly from downturns, and long periods of weak demand drag prices even lower — creating a cycle of stagnation.
“While the underlying global disinflationary factors are likely to evolve over time, there is little reason to think that they have suddenly reversed or abated,” Mr. Powell said. “It seems more likely that they will continue to weigh on inflation as the pandemic passes into history.”
He also offered a detailed explanation of what the Fed is watching when it comes to prices, emphasizing that inflation is “so far” coming from a narrow group of goods and services. Officials are keeping an eye on incoming data to make sure prices for durable goods like used cars — which have recently taken off — slow and even fall.
Mr. Powell said the Fed sees “little evidence” of wage increases that may threaten high and lasting inflation. And he pointed out that measures of inflation expectations have not climbed to unwanted levels, but have instead staged a “welcome reversal” of their previous unhealthy decline.
Still, his remarks carried a tone of watchfulness.
“We would be concerned at signs that inflationary pressures were spreading more broadly through the economy,” he said.