Federal Reserve Chairman Jerome Powell’s widely anticipated comments on the economic outlook did not disappoint on Friday as he reaffirmed market expectations of a slowing in the pace of monetary accommodation before the end of the year while retaining flexibility around the rising economic risks linked to the delta variant.
Should those risks proliferate and overall economic activity slows in the August, September and October data, then the Federal Reserve is well positioned to use the risk around delta to push back the start of its gradual slowing of monetary accommodation. We expect that slowing will take the better part of next year.
Perhaps just as important, Powell reminded market participants and other policymakers that a tapering of $120 billion a month in asset purchases is not the same as a tightening of rates.
“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 liftoff, for which we have articulated a different and substantially more stringent test,” he said at the Economic Policy Symposium at Jackson Hole, Wyo., which was held virtually.
In addition, Powell put forward a two-part test on how “substantial further progress” is defined: inflation and employment. While Fed officials think that they have met that test on inflation and they have made progress on their employment goals, the central bank is not there yet.
This speech, along with the July minutes from the Federal Open Market Committee meeting, implies that the Fed most likely expects the recent gains in the labor market to continue and put the central bank on track to announce the tapering of asset purchases in November with a likely start of operations in December.
The dovish statement on the Fed’s asset purchase policy and the optimistic outlook on hiring combined to send equity prices higher and bond yields lower in the immediate aftermath of the speech, which was well received by market actors and investors.
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