Balancing the threat of Covid with the ongoing economic recovery, Powell suggested the Fed, which has been buying $120 billion worth of Treasury and mortgage-backed securities every month since the height of the pandemic to support the economy, will start pumping the brakes on those asset purchases before the end of the year.
Interest rates are still near zero as well, though they won’t move until the monthly asset purchases are addressed.
But on Friday, Powell said that the test for inflation has now been met and that “has also been clear progress toward maximum employment.”
“The pace of total hiring is faster than at any time in the recorded data before the pandemic,” Powell said. “These favorable conditions for job seekers should help the economy cover the considerable remaining ground to reach maximum employment.”
But that still doesn’t mean the money taps will be turned off right away.
“For now, I believe that policy is well positioned,” Powell said. He also stressed that a reduction to the monthly shopping spree wouldn’t be a direct signal to raise interest rates.
“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,” Powell said.
No taper tantrum
Financial markets shrugged off Powell’s foreshadowing of a tapering.
Wall Street was in the green, with all three major stock indexes adding to modest gains as he spoke.
The yield on the 10-year Treasury bond was also little changed as the symposium got underway, down 0.02% at 1.33%.
Investors remain somewhat on edge about the eventual tapering announcement: The last time the Fed rolled back its monthly purchases in 2013, the market fell into a so-called “taper tantrum”, characterized by a steep rise in bond yields in just a matter of months.
Prior to the Jackson Hole speech, investors broadly agreed that the Fed wouldn’t officially announce a reduction of its monthly buys until the fall or winter meetings.