Author: Christopher Rugarber | Associated Press
WASHINGTON — Federal Reserve Chairman Jerome Powell said on Friday that as long as hiring continues to improve, the Fed will begin to withdraw its ultra-low interest rate policy this year, marking the beginning of the end of the Fed’s extraordinary response to a pandemic recession.
In a speech at an almost annual gathering of central bank governors and academics, Powell said that the economy has improved significantly this year, and the average number of hiring in the past three months has reached the highest on record in any similar period before the pandemic. level. He said that Fed officials are monitoring the rapid increase in infections from delta variants, but they expect healthy job growth to continue.
The Federal Reserve has been buying $120 billion in mortgages and Treasury bonds every month in an attempt to lower long-term loan interest rates to stimulate borrowing and spending. Powell’s comments indicate that the Fed may announce a reduction — or “gradual reduction” — of these purchases sometime in the last three months of this year.
Powell emphasized that the Fed’s reduction of bond purchases does not mean that it plans to start raising the benchmark short-term interest rate soon, which has remained close to zero since the pandemic swept the economy in March 2020. It is unlikely that interest rate hikes will begin until the Fed ends its bond purchases, which may not happen until mid-2022. Powell said that the Fed needs to see the economy improve further before it can start raising the key interest rate, which will affect many consumer and commercial loans.
In his speech, Powell further emphasized his view that the current surge in inflation is largely temporary. He warned that history shows that raising interest rates prematurely in response to temporary price increases will weaken recruitment and hurt the unemployed.
These comments support the view that the Fed has a long way to go before raising its benchmark short-term interest rate.
Brian Bethune, an economist at Boston College, said: “If there is any difference, it is a calm speech.” “Nothing can push up interest rates in the short term.”
Over time, the end of Fed bond purchases may put upward pressure on the borrowing costs of mortgages, credit cards, and commercial loans. However, when Powell delivered a speech on Friday, the yield on the 10-year U.S. Treasury note, which is closely related to the 30-year mortgage interest rate, fell to 1.32% from 1.34% on Thursday.
Stock investors also seem to welcome Powell’s message about the Fed’s phasing out of economic support, and his view that the surge in inflationary pressures may only be temporary. A few hours after the Fed Chairman’s speech, the Dow Jones Industrial Average surged 250 points, or 0.7%.
Steve Friedman, an economist and former senior executive at the asset management company MacKay Shields, said: “The market realizes that interest rate hikes are different from the test of interest rate cuts. Any communication about interest rate cuts will not have any direct impact on interest rate hikes.” New York Fed staff.
This is in sharp contrast to 2013, when Ben Bernanke, then chairman of the Federal Reserve, unexpectedly hinted that the Federal Reserve would reduce bond purchases soon, triggering what came to be known as the “cutting panic”-a speech that pushed up the long-term Interest rate spikes. Part of the reason for the increase in interest rates was that investors believed that the beginning of the reduction meant that interest rates rose to follow, which turned out not to be the case.
On Friday, Powell stated that inflation has risen enough to meet the Fed’s test of gradually achieving “substantial further progress” towards the 2% annual inflation target, which is necessary for the start of the reduction. He said that the Fed has also made “significant progress” in achieving its goal of maximizing employment. He delivered a speech at the Jackson Hole Economic Symposium via a live webcast, which has actually been held for the second consecutive year due to COVID-19.
But Powell said that although inflation has soared and has caused difficulties for millions of Americans, once the economy further normalizes from the pandemic and the supply shortage eases, price increases should ease.
The Fed chairman warned that if the Fed reduces stimulus “in response to temporary factors,” “untimely policy measures will unnecessarily slow down recruitment and other economic activities, and drive inflation below expectations.”
Powell also pointed out that although average wages have risen, they have not increased enough to raise concerns about the “wage price spiral”, as happened during the hyperinflation of the 1970s.
“Today,” he said, “we hardly see any signs of wage growth that could threaten excessive inflation.”
Powell said that, if any, the factors that helped keep inflation at an ultra-low level before the pandemic—the growth of online retail, low-cost goods from overseas, and slower population growth—may fade with the pandemic. And reappear.
However, Powell’s remarks highlighted the differences between the Fed’s decision-making committee, including himself, Fed Governor Lael Brainard and other officials (supporting patiently reversing the low interest rate policy), and other policymakers pushing for curtailment. Start as soon as possible so that you can raise interest rates quickly when needed.
Raphael Bostic, President of the Federal Reserve Bank of Atlanta, said on CNBC before Powell’s speech earlier Friday: “Let’s start scaling down, and let’s finish as soon as possible.” Bostic Said that he expects the Fed to raise interest rates by the end of 2022-earlier than the average level of all Fed policymakers, who are expected to raise interest rates for the first time in mid-2023.
The sharp rise in inflation has caused more and more scrutiny of the Fed’s ultra-low interest rate policy. Congress and ordinary families have been squeezed by the soaring prices of food and hotel accommodation, as well as new and used cars. According to the Fed’s preferred indicator, inflation in July rose 3.6% from the same period last year, the largest increase in 30 years. The month-on-month growth rate slowed from 0.5% to 0.3%.
What complicates the Fed’s decision-making is the resurgence of a pandemic led by delta variables, which greatly reduced the Fed’s expectation that the economy and the job market will be on a path of marked improvement by this fall. Delta variants may slow down spending in areas such as air travel, restaurant dining, and entertainment.
In his speech on Friday, Powell did not outline any specific timetable for the Fed to start slowing down its bond purchases. Many economists say that the release of one or two more strong monthly employment reports may trigger the start of a correction before the end of the year.
Paul Ashworth, chief US economist at Capital, said: “Even if we see another substantial increase in employment in August, we suspect that the threat of delta variants means that most officials will want to wait until the November meeting to give the green light.” Economics.
AP economics writer Paul Wiseman contributed to this report.