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Jerome Powell: Fed is ready to start cutting back on asset purchases this year

An annual economic symposium was held in the American Jackson Hole on August 27, during which the head of the Fed, Jerome Powell, presented a long-waited speech. In his speech, he stated that “if the economy continues to develop as expected, it would be wise to start slowing down the pace of asset purchases this year.”

Thus, Powell marked the first step in tightening US monetary policy. At the same time, the Fed chairman stressed that the decision will be made based on the current situation, and the delta variant of coronavirus is still a threat. Powell also mentioned that there is no talk of raising the key rate.

Key points of the speech

  • Labor market

Labor market conditions are improving but still quite volatile, and the pandemic continues to threaten not only the health of US citizens but economic activity as well.

The unemployment rate fell to 5.4%, a post-pandemic low, but still high enough.

Total employment is now 6 million below the February 2020 level, and 5 million of this deficit is in the services sector.

That said, there is clear progress in the recovery of the labor market, and if the economy continues to grow as expected, it would be reasonable to start slowing down the pace of asset purchases this year.

The Delta variant still represents short-term risk.

  • Inflation

The rapid opening of the economy led to a sharp jump in inflation. In the 12 months to July, inflation rates for general and basic personal consumption expenditures were 4.2% and 3.6%, respectively, well above the long-term target of 2%.

Inflation at these levels is worrisome, but these inflated readings are likely to be temporary.

  • Monetary policy

At a time when the labor market is in a significant downturn and the pandemic continues, early tightening of policies can be especially dangerous.

If the sustained rise in inflation became a serious problem, the Federal Open Market Committee (FOMC) would react and use instruments to bring inflation down to target levels.

The committee will support the economy until its full recovery. Last year’s changes in long-term goals and monetary policy strategies are well suited to address today’s challenges.

We will continue to acquire assets at our current pace until we see significant further progress towards our goals of maximum employment and price stability.

The timing and pace of the forthcoming reduction in asset purchases will not serve as a direct signal about the timing of the rise in interest rates.