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Fed on track to taper by end of the year, says Powell

Federal Reserve chair Jerome Powell signalled on Friday that the US central bank is on track to start tapering asset purchases later in the year if the economy continues to show progress.

Speaking at the virtual Jackson Hole symposium, Powell said the US economy had reached the point where it no longer needs monetary support, but also that there are no plans to raise interest rates any time soon.

Powell said: “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.

“The intervening month has bought more progress in the form of a strong employment report for July.

“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 lift off.”

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said Powell stuck to the script and that anyone hoping for a steer on the timing of the taper will have been disappointed.

“With vaccinations rising, schools reopening, and enhanced unemployment benefits ending, some factors that may be holding back job seekers are likely fading,” he said.

“The Fed’s conviction that the spike in inflation will be transitory means that policymakers are happy to wait. Chair Powell noted that inflation so far has been driven up almost exclusively by Covid-driven factors, while longer-term inflation expectations haven’t moved much, and broad measures of composition-adjusted wage growth remain unthreatening. Mr. Powell noted the risk that faster wage growth could, if it persisted, drive an old-style wage-price spiral, but he clearly believes that is not a likely outcome.

“In short, the song remains the same; the test for ‘substantial further progress’ has been met for inflation, but not for employment, and the Delta variant poses new risks. We still think it’s reasonable to expect the tapering announcement in November, but it could easily be delayed if the post-Delta rebound takes longer than we expect.”

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