The Economy

Powell Remains Cautious on Stimulus ‘Tapering’

The Fed chair confirmed officials are moving toward winding down the monthly bond-buying program but was not specific about timing.
Matthew HellerAugust 27, 2021

Federal Reserve Chairman Jerome Powell has confirmed that the Fed is moving toward winding down its emergency economic stimulus program, citing progress in meeting its inflation and employment goals.

The Fed has pledged to maintain reducing its monthly $120 billion asset purchase program until it sees “substantial further progress” on its goals of average 2 per cent inflation and maximum employment.”

At a meeting last month, a majority of Fed officials indicated they believed it would be appropriate to start “tapering” the program this year.

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Powell reiterated that view in a speech Friday, saying he believed the ‘substantial further progress’ test has been met for inflation” and that “There has also been clear progress toward maximum employment.”

He wasn’t specific about timing, however, and cautioned that since the July meeting of the Federal Open Market Committee, there has been a “strong employment report … but also the further spread of the Delta variant” of the coronavirus.

If tapering were imminent, “then surely Powell would have dropped a heavier hint today rather than just repeating what was in the July minutes” of the FOMC meeting, said Paul Ashworth, chief US economist at Capital Economics.

As the Financial Times reports, “The question of when the Fed would pull back from its bond-buying program has left investors jittery in recent months as they brace for heightened volatility in financial markets.”

“Conflicting economic signals have also made it difficult for central bankers to reach a consensus on when exactly the ‘tapering’ process should begin, and at what point these bond purchases should cease altogether,” the FT added.

Powell insisted Friday that “If sustained higher inflation were to become a serious concern, the Federal Open Market Committee would certainly respond and use our tools to assure that inflation runs at levels that are consistent with our goal.”

On the employment front, he noted that “Labor market conditions are improving but turbulent, and the pandemic continues to threaten not only health and life, but also economic activity.”

Economists at Goldman Sachs continue to expect the Fed to formally announce the start of tapering in November.