The Fed is about to liquidate its emergency economic stimulus, hints Jerome Powell

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But in his long-awaited speech at the Jackson Hole virtual symposium, Powell moderated his optimism with a few words of caution: The Delta variant remains a threat to the U.S. economy.

The speech did not provide an exact timeframe for the Fed’s recovery of stimulus from its monthly asset purchases, known to Wall Street investors as “reduced.”

To balance Covid’s threat with the ongoing economic recovery, Powell suggested that the Fed, which has bought $ 120 billion worth of treasury and mortgage securities every month since the pandemic grew to support the ‘economy, would begin to slow them down. purchase before the end of the year.

This was in line with the minutes of last week’s July meeting, which had caused a brief stir in the market.

The right conditions to shrink

At Jackson Hole, Powell noted the progress the economy has made since last year’s recession.

The Fed, which has the task of keeping prices stable and getting maximum employment, sought to advance on these two fronts in recent months before changing its policy.

But on Friday, Powell said the inflation test has now been met and that “there has also been a clear advance towards maximum employment.”

“The total recruitment rate is faster than at any time in the data recorded before the pandemic,” Powell said. “These favorable conditions for job seekers should help the economy cover the considerable remaining ground to achieve maximum employment.”

Between June and July, the U.S. economy added about 1.9 million jobs. And next week’s August job report is also expected to be strong.
On Friday earlier, the Fed’s preferred measure of inflation (the PCE price index) hit a 30-year high, well above the bank’s target of around 2%. Powell has long said the rise in inflation will only be temporary and will dissipate as pandemic conditions ease. He reiterated this in his speech.

But even so, that doesn’t mean the money keys are turned off immediately.

“At the moment, I think the policy is well positioned,” Powell said. He also stressed that a reduction in monthly purchases would not be a direct signal to raise interest rates.

The minutes of the July Fed meeting showed that most central bank officials believed monthly asset purchases could fall back later this year if the economy continues at its current pace.

If volume reduction were imminent, “surely Powell would have left a heavier touch today than just repeating what was in the July events,” said Paul Ashworth, chief U.S. economist at Capital Economics.

In addition, the recovery has its own problems: “The intermediate month has led to further progress in the form of a strong employment report for July, but also the new expansion of the Delta variant,” Powell said.

Cases of increasing Covid-19 in the back of the most infectious Delta variant have weighed some economic indicators recently.
As Powell spoke Friday morning, the final August reading of the University of Michigan Consumer Sentiment Index showed “no decline … in the extent of the collapse in consumer sentiment recorded during the first half of the month “.
The indicator had fallen to its worst level since December 2011 in a preliminary statement earlier this month.

No rage

Financial markets set aside Powell’s omen of a downturn.

Wall Street was in the green, with all three major stock indices adding to modest gains after Powell’s direction.

The yield on the ten-year Treasury bond fell by 0.02% to 1.32%.

Investors are keeping pace with the eventual reduced announcement: the last time the Fed withdrew its monthly purchases in 2013, the market fell into the so-called “taper rage”, characterized by a sharp rise of bond yields in a matter of months.

Prior to the Jackson Hole speech, investors generally agreed that the Fed would not officially announce a reduction in its monthly purchases until the fall or winter meetings.

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