It’s time for the Fed to cut bond purchases but not raise rates, Powell says

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Federal Reserve Chairman Jerome Powell attends the House Financial Services Committee hearing on September 30, 2021 on Capitol Hill in Washington, United States. Al Drago / Pool via REUTERS

Oct. 22 (Reuters) – Federal Reserve Chairman Jerome Powell said Friday the US Federal Reserve should begin the process of reducing its support to the economy by cutting its bond purchases, but not yet touching the interest rate spectrum.

“I think it’s time to cut rates. I don’t think it’s time to hike rates, “Powell said on a virtual appearance before a conference, noting that there are still five million fewer jobs in the US than before the coronavirus pandemic . He also reiterated his view that high inflation is likely to ease over the next year as pressures from the pandemic ease.

“We think we can be patient and allow the labor market to recover,” he said.

The Fed has promised to keep its overnight reference rate at its current level, close to zero, until the economy has returned to full employment and inflation has hit the central bank’s 2% target and is on its way to moderately above that level for some time to stay.

It is “very possible” that the Fed’s full employment target could be met next year, Powell said on Friday, if supply chain constraints ease as expected and the service sector opens up more fully, which can accelerate employment growth again. Job growth slowed sharply in August and September as COVID-19 cases rose.

However, it is not certain, and if inflation continues to move higher – higher and longer than originally expected – the Fed will act “safely”, he said.

“Our policies are well positioned to produce a number of plausible results,” added Powell. “We have to watch and watch closely that the economy is developing in line with our expectations, and we have to adjust policies accordingly.”

The remarks appeared to open the door to an opportunity the Fed fears: the need to hike interest rates to keep inflation from spiraling out of control and thereby shorten job recovery.

Powell said he doesn’t see this as the current situation, but sees growing tension between the Fed’s two mandates, full employment and stable prices.

“The risks now are clearly longer and more persistent shortages and therefore higher inflation,” he said. For now, the Fed has to “see through” this high inflation, despite the pain it means for households to have to pay more for gas and food in order to give the economy time to resolve supply bottlenecks.

HIGHER PRICES COMING

The Fed has signaled that it is expected to begin cutting its monthly purchases of government bonds and mortgage-backed securities by $ 120 billion next month.

About half of Fed leaders believe a rate hike will have to follow in 2022, and some suggest it will have to happen by the summer. The other half of US rate-setters don’t think rate hikes until 2023 are appropriate, and one of them – Minneapolis Fed President Neel Kashkari – will hold out until 2024.

However, the latest data seem to agree with the views of those pushing for earlier increases in borrowing costs.

Consumer prices have risen more than twice the Fed target.

And, Powell said, “supply constraints and increased inflation are likely to last longer than previously expected and well into next year, and so will pressure on wages.”

The most likely case, however, is that inflationary pressures will ease and employment growth will pick up again since last summer.

For now, the Fed will watch and wait, Powell said.

Reporting by Ann Saphir, Lindsay Dunsmuir, Jonnelle Marte Editing by Paul Simao

Our Standards: The Thomson Reuters Trust Principles.


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