Powell: Tightening could start by year end

Federal Reserve Chairman warns of the dangers of tapering too suddenly

Addressing the Jackson Hole summit on Friday, Federal Reserve Chairman Jerome Powell signalled the central bank could start to taper its bond-buying programme by the end of this year.

The Fed intervened greatly in response to the COVID-19 crisis, cutting interest rates to record lows and setting out on a programme of quantitative easing (QE) greater than in the wake of the Global Financial Crisis. 

QE is the process by which central banks have been injecting money into their economies during the pandemic, buying back government bonds from financial institutions with 'new' cash.

Fed Chair stresses importance of timing

​​In his speech at the 'virtual' symposium, Powell said: “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 lift-off, for which we have articulated a different and substantially more stringent test.”

He added that the central bank had achieved the “substantial further progress” it had targeted for inflation and had made “clear progress toward maximum employment".

The US unemployment rate for July came in at 5.4%. Although this represented a marked improvement for the decades-long high of 14.8% witnessed in April 2020, it nonetheless stood 1.9% above the jobless rate enjoyed just before the crisis in February 2020. 

Inflation and Delta variant

Since the easing of Covid restrictions,the US has experienced substantially higher inflation than the Fed had previously forecast. US consumer prices witnessed their largest 12-month increase in the year to June since August 2008. 

Powell admitted that current levels of inflation were a cause for concern but maintained his long-held view that the phenomenon will prove to be ‘transitory’.

Emphasising the dangers of knee-jerk reactions and “ill-timed policy” moves, Powell stated: “Today, with substantial slack remaining in the labour market and the pandemic continuing, such a mistake could be particularly harmful. We know that extended periods of unemployment can mean lasting harm to workers and to the productive capacity of the economy.”

Although he recognised that the COVID Delta variant “presents a near-term risk”, the 68-year old argued: “The prospects are good for continued progress toward maximum employment".

Market reaction

Despite the hint of eventual tapering, Powell’s speech was interpreted as relatively dovish. 

By mid-morning (EDT), the Dow, S&P and Nasdaq traded up by 0.6%, 0.7% and 1%, respectively. US Treasury yields experienced a moderate dip, with the 10-year note falling by four basis points to 1.319%. 

The dollar weakened by 0.4% against sterling and 0.2% against the yen. 

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