Powell Message Shows Clear Direction Mixed with Uncertainty on Inflation

The U.S. Federal Reserve could start cutting the monthly asset purchases this year, but would not rush raising interest rates, Chairman Jerome Powell said on Friday, in his speech to the Jackson Hole Economic Symposium.

Powell explained that the American economy has made substantial further progress toward the Fed’s price stability target, with inflation above 2%. He also noted that the labor market has achieved clear progress on the road to the full employment goal.

“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 liftoff, for which we have articulated a different and substantially more stringent test.”

Powell revealed that his view during the July meeting was in line with most FOMC members, seeing that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year.

Recent data showed more progress in the form of a strong employment report for July, but also the further spread of the Delta variant, he noted, adding that the Fed will be carefully assessing incoming data and the evolving risks.

Powell explained that the Fed “will continue to hold the target range for the federal funds rate at its current level until the economy reaches conditions consistent with maximum employment, and inflation has reached 2% and is on track to moderately exceed 2% for some time.”

“We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2% inflation on a sustainable basis.”

The Fed Chair reiterated his message that the current inflationary pressures are likely to be transitory, despite the July meeting minutes showing concerns among Fed members about if high inflation could persist for longer than usual.

But uncertainty regarding inflation and other issues remains, as evident by the July meeting minutes. “We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2% inflation on a sustainable basis,” Powell stated.

Powell thinks that the high inflation is due to supply chain bottlenecks and disruptions impacting a set group of goods and services.

“While the underlying global disinflationary factors are likely to evolve over time, there is little reason to think that they have suddenly reversed or abated.”

“It seems more likely that they will continue to weigh on inflation as the pandemic passes into history.”