Addressing the annual Jackson Hole Economic Symposium last week, Federal Reserve chairman Jerome Powell said he believed the “substantial further progress test” had been met in the US economy to indicate higher inflation could be here to stay as the nation’s economic recovery continued apace.
“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,” Mr Powell said.
“At the [Federal Open Market Committee’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.”
However Mr Powell added the central bank would be “carefully assessing incoming data and evolving risks”, particularly that of the Delta variant of COVID-19.
He said any rises in interest rates would not occur on the same time scale as the tapering of its bond-buying program, as the US economy had not yet reached “conditions consistent with maximum employment,” Mr Powell said.
“The unemployment rate has declined to 5.4 percent, a post-pandemic low, but is still much too high, and the reported rate understates the amount of labor market slack.”
Commenting on Mr Powell’s remarks, Janus Henderson multi-asset portfolio manager Oliver Blackbourn said the aim to begin tapering bond buying later this year was consistent with market expectations, but how this was to be achieved was still up in the air.
“Given the market’s link between when quantitative easing ends and when interest rates can start rising, this still leaves room for a more hawkish surprise on 22 September if a path for tapering is announced following the Fed’s meeting,” Mr Blackbourn said.
“A rapid paring back of asset purchases could be seen as setting up the potential for earlier hikes. Powell was keen to push back against this link but it is likely to remain in the market’s collective psyche.”
