The US central bank this month is to begin to slow its stimulus bond purchases, as the US economy makes a solid recovery from the COVID-19 pandemic, but the bank would be patient before raising interest rates, US Federal Reserve Chairman Jerome Powell said on Wednesday.
Amid growing concern about rising prices, Powell stuck to his view that current higher-than-expected inflation levels would come down in the second half of next year as the supply bottlenecks are resolved.
The Fed wants to see the labor market in the world’s largest economy heal further before increasing the benchmark borrowing rate off zero, he said.
“We think we can be patient,” Powell told reporters.
However, the Fed was prepared to act if needed, and “if a response is called for, we will not hesitate.”
As a first step to walk back the stimulus, the Fed’s policy-setting Federal Open Market Committee (FOMC) this month announced that it would start reducing the monthly pace of purchases by US$10 billion for Treasuries and US$5 billion for mortgage-backed securities.
The FOMC expects to continue lowering the total by the same amount each month, which means bond purchases would cease by the middle of next year, Powell said.
However, the committee “is prepared to adjust the pace of purchases” if the economic outlook changes, the statement said.
Addressing critics of his patient stance, Powell, who is awaiting word on whether US President Joe Biden would name him for a second term, said: “I don’t think we are behind the curve. I believe policy is well-positioned to address the range of plausible outcomes.”
However, more economists are predicting faster tapering and more aggressive rate hikes.
Diane Swonk of Grant Thornton expects both, with three rate hikes next year.
“The Federal Reserve has been growing more divided over the course of the summer and into the fall. Chairman Powell would prefer to wait out inflation longer than many of his colleagues,” she said.
“We expect the FOMC to accelerate the tapering of its asset purchases in early 2022. This will open the door to sooner and more aggressive rate hikes,” she said.
Powell said that the economy would have been on a better track if the wave of infections over the summer caused by the Delta variant of SARS-CoV-2 had not caused the recovery to stumble and “stopped job creation.”
However, he said he expects to see more improvement in areas such as travel and leisure.
“We don’t think it’s time yet to raise interest rates. There is still ground to cover to reach maximum employment,” Powell said.
“It’s appropriate for us to see what the labor market and what the economy look like when they heal further,” he said.
Inflation currently is running at more than double the Fed’s 2 percent goal, and Powell acknowledged that the severity and duration of the price increases were more than officials anticipated.
He projected that inflation would come down late next year, but added that judging when supply chain issues would be resolved “is highly uncertain.”
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