(Bloomberg) — Federal Reserve Chair Jerome Powell said the central bank could begin slowing its asset purchases this year, though it won’t be in a hurry to begin raising interest rates thereafter.
Speaking at the Fed’s annual Jackson Hole policy forum, Powell said the U.S. economy has met the central bank’s test of “substantial further progress” toward its inflation goal and that it has made “clear progress” on the labor market front.
The symposium has been a stage for important policy announcements in the past and investors were on the lookout for any indication on when the Fed could start tapering its $120 billion-per-month in asset purchases. Stocks rose after Powell spoke, while the dollar weakened and the 10-year Treasury yield fell.
Powell didn’t provide a specific month for the paring, but most officials agreed the process should before the end of this year, according to minutes of the July meeting. Some favor an announcement at their meeting next month.
The conference, hosted by the Kansas City Fed and traditionally held in Jackson Hole, Wyoming, with the peaks of the Teton mountain range providing a laid-back atmosphere for the usually buttoned-up crowd, is being held virtually for the second straight year as coronavirus infections surge around the country.
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Easy Policy Can Help Economy Adjust to Covid: Jackson Hole Paper (10:30 a.m. ET)
Expansionary monetary policy can help smooth an economy’s adjustment to shocks like Covid-19, according to a paper presented at this year’s Jackson Hole conference.
“A desire to facilitate the reallocation process can lead to favor a more expansionary monetary policy,” said the paper’s author — Veronica Guerrieri of the University of Chicago, Guido Lorenzoni of Northwestern University, Ludwig Straub of Harvard University and Ivan Werning of the Massachusetts Institute of Technology.
Guerrieri and her co-authors contrast that with the idea that “excessively easy monetary policy may hamper the reallocation process” — for instance, between two sectors like service-providing and goods-producing industries — because “some businesses and some jobs that get destroyed in a recession are not going to be viable even after the recession is over,” they said.
“By stimulating demand in the aggregate, monetary policy ends up stimulating activity also in those sectors, possibly slowing down the reallocation process,” the authors wrote.
That argument doesn’t take into account that inflation in a supply-constrained sector toward which reallocation is occurring, supported by easy monetary policies that boost aggregate demand, will help boost wages in that sector. That, in turn, will incentivize more workers to take jobs there, helping to resolve the imbalance, the authors said.
“Higher inflation can facilitate the adjustment of relative wages, so as to provide the right price signals to encourage mobility,” they wrote.
Powell Says Taper Could Start in 2021, With No Rush on Rate Hike (10 a.m. ET)
In his prepared text of the speech, Powell said the central bank could begin reducing its monthly bond purchases this year, though it won’t be in a hurry to begin raising interest rates thereafter.
The economy has now met the test of “substantial further progress” toward the Fed’s inflation objective that Powell and his colleagues said would be a precondition for tapering the bond purchases, while the labor market has also made “clear progress,” the Fed chief said in the remarks.
At the Fed’s most recent policy meeting in late July, “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,” Powell said.
“The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the delta variant,” he said. “We will be carefully assessing incoming data and the evolving risks.”
Bullard Says Continued Bond Buying May Do More Harm Than Good (9:30 a.m. ET)
St. Louis President James Bullard said continued bond buying by the central bank may be doing more harm than good.
“I would like to taper now and get it finished by the first quarter” of 2022, Bullard said in interview with Bloomberg Television.
Finishing bond purchases would give the Fed the option of raising interest rates in 2022 to put downward pressure on inflation, if that’s needed, he said.
Bullard added that, “at some level” financial markets have already priced in a reduction in bond purchases, reducing the risk of a negative reaction from investors.
Harker Says Delta Variant ‘Clearly a Problem’
People are still concerned about health risks, preventing them from returning to work; highly accommodative policy isn’t going to solve this problem, Philadelphia Fed President Patrick Harker said in an interview with Bloomberg TV.
The delta variant is “clearly a problem,” Harker said, and the way to get the pandemic under control is to get people vaccinated.
Harker said he wants to start the taper process sooner rather than later, and keep it as simple as possible, and after that think about raising interest rates.
“We’re not there yet,” he said.
Kaplan Says Taper Process Should be Done in 8 Months (9:30 a.m. ET)
Tapering should start “as soon as possible,” Kaplan said in the interview.
Kaplan said he’d prefer a gradual tapering of asset purchases, over an eight month period, and that starting the process soon could give the Fed more flexibility when it comes to making interest-rate decisions.
Imbalances in the labor market, with some businesses needing to raise wages to attract the workers they need, may feed into persistently higher inflation, Kaplan said.
Mester Favors Starting Bond Tapering Sometime This Year (9 a.m. ET)
Federal Reserve Bank of Cleveland President Loretta Mester said the U.S. economy has met the Federal Open Market Committee’s guidance for beginning to taper bond purchases.
“I’m comfortable that we’re basically there,” Mester says Friday in an interview on CNBC television. “We’ve certainly made substantial further progress since December.”
Mester said she favors beginning to reduce monthly bond purchases sometime this year, and ending the purchases in the middle of 2022.
The delta variant of Covid-19 is not altering the outlook for businesses in her district, Mester said.
U.S. Personal Spending Growth Moderates, While Price Index Rises
As investors await Powell’s speech, a key economic data report was released Friday. U.S. personal spending growth moderated in July, reflecting a drop in purchases of goods, while a closely watched measure of inflation remained elevated.
Members of the Fed and other policy makers have been debating whether the recent pickup in inflation is transitory — related to the reopening of the economy and supply constraints — or a more permanent trend.
The report shows personal incomes rose more than forecast, reflecting the distribution of advance child tax credit payments and more compensation.
Bostic Says ‘Let the Economy Stand on Its Own’ (8:30 a.m. ET)
“We should be trying to get our policies back into a more normal situation,” Bostic said in a Bloomberg TV interview with Michael McKee. “We have been at a very extreme level of accommodation” and “the economy calls for us to pull off of that a little bit and let the economy stand on its own.”
Bostic said the Fed has met its goal needed to taper regarding inflation, and could meet the labor market side of the equation soon.
The Fed will be able to taper asset purchases faster than the last time it pulled back on the stimulus, following the financial crisis, amid a strong economy, Bostic said in the interview.
An announcement of tapering shouldn’t incite a strong market reaction, Bostic said. He also repeated that he sees the central bank raising interest at the end of 2022.
Bostic Favors Quick Taper, Sees First Hike End 2022 (7:30 a.m. ET)
“My view would be, let’s start the taper let’s let’s do it quickly, let’s not have this linger,” Bostic said in the CNBC interview.
Bostic’s comments were similar on timing to views expressed in early August, when he said he could see a move following another month or two of big gains of jobs.
In the interview, Bostic also said he sees a lot of “episodic aspects” to the inflation dynamic. From conversations with business leaders, they anticipate inflation may go well into 2022, longer than people expected, Bostic said.
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