MNI: Fed Could Taper This Year, Powell Wants More Job Progress

Jerome Powell on Friday warned the Federal Reserve could start paring back bond purchases later this year, saying the U.S. labor market is making clear progress toward maximum employment.

"At the FOMC's recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year," Powell said in prepared virtual remarks for this year's Jackson Hole conference.

"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. We will be carefully assessing incoming data and the evolving risks."

Some market participants had expected a more concrete nod into the likely timing of a reduction in asset purchases, although MNI had reported that such a signal would be much more likely at the upcoming September policy meeting. (See MNI: Fed Set for Sept. Taper Warning After Jobs Surge--Advisers)

Powell said the Delta variant is unlikely to sufficiently hurt economic activity to derail the Fed's plans. "While the Delta variant presents a near-term risk, the prospects are good for continued progress toward maximum employment," Powell said.

"The outlook for the labor market has brightened considerably in recent months. With vaccinations rising, schools reopening, and enhanced unemployment benefits ending, some factors that may be holding back job seekers are likely fading."

'CAUSE FOR CONCERN'

He also reiterated his view that inflation pressures, while high at the moment, will probably subside with time. The Fed's favored PCE measure of inflation rose 4.2% in the year to July, according to Commerce Department figures on Friday.

"Inflation at these levels is, of course, a cause for concern," he said. "But that concern is tempered by a number of factors that suggest that these elevated readings are likely to prove temporary. This assessment is a critical and ongoing one, and we are carefully monitoring incoming data."

Powell does not see any tapering decision as dictating the timing of eventual interest rate hikes. "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," he said.

He also indicated he sees pre-pandemic levels of employment as attainable once more.

"Before the pandemic, we all saw the extraordinary benefits that a strong labor market can deliver to our society," Powell said. "Despite today's challenges, the economy is on a path to just such a labor market, with high levels of employment and participation, broadly shared wage gains, and inflation running close to our price stability goal."