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Federal Reserve Chairman Jerome Powell on Wednesday triggered the start of a pullback in the central bank’s extraordinary monetary stimulus in times of crisis, saying it could end its asset purchase program before the end of 2022.
“Participants generally felt that as long as the economic recovery stays on track, a phase-down process that ends around the middle of next year is likely to be appropriate,” Powell told reporters on Wednesday.
Earlier in the afternoon, the Federal Open Market Committee on policy-making said the recovery in the US economy is progressing well enough for the Fed to soon slow down its purchases of US Treasuries and agency mortgage-backed securities (which it purchases at an aggregate rate of about $ 120 billion per month).
“If progress continues overall as planned, the Committee considers that a moderation in the pace of asset purchases may soon be justified,” said the FOMC statement.
The Fed’s tilt towards a tap announcement suggests that the central bank might be ready by its next meeting in early November to actually announce something.
The central bank has said it will not start to slow until the economy appears to have made “further substantial progress” towards the Fed’s dual tenure goals of maximum employment and stable prices.
Powell said inflation well above the Fed’s 2% target had made such progress, but said the labor market recovery had failed. An August jobs report showed 235,000 job gains, well below the more than 700,000 payroll gains estimated by Wall Street for that month.
“The test of further substantial progress for jobs is almost reached,” said Powell.
Evergreat risks?
The Fed remained optimistic about the economic recovery, with half of the 18 FOMC members now arguing for at least one rate hike next year. The other half see the Fed keeping rates close to zero until 2022.
But the FOMC has recognized some downside risks as the Delta variant continues to weigh on sectors hardest hit by the pandemic.
Powell allayed concerns about other downside risks like the ripple effect of Evergrande, a Chinese real estate conglomerate at risk of collapsing under the weight of its own debt. The Fed chief said the problem appears to be “very China-specific” at the moment.
“It’s something that they manage,” said Powell. “In terms of the implications for us, there isn’t a lot of direct exposure in the United States.”
Powell also noted the risk associated with the debt ceiling. The US Treasury burns its cash balances to pay its bills as Congress works to raise the debt ceiling, but Treasury Secretary Janet Yellen has warned of a “widespread economic catastrophe” if its balances were to fail. dry up.
The Fed chief urged Congress to raise the debt ceiling “in a timely manner”, adding that a default on the national debt would cause “serious” damage to the economy and financial markets.
Powell is expected to testify on Capitol Hill next week as part of a follow-up to the Fed’s response to the pandemic, first on September 28 and then again on September 30.
Brian Cheung is a reporter covering Fed, Economics and Banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
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