If economy stays on track, bank will move to raise interest rates
Despite the latest wave of COVID deaths and hospitalizations spurred by the Delta variant, the economy has been slowly but surely showing positive signs. The last couple of monthly jobs reports have been promising, and Federal Reserve chairman Jerome Powell said Friday the central bank might soon begin tapering its purchases of bonds that have been key to its pandemic stimulus efforts.
“While the Delta variant presents a near-term risk, the prospects are good for continued progress toward maximum employment,” Powell told the virtual Jackson Hole Economic Symposium.
The Dow Jones jumped 225 points on Powell’s comments. The $120 billion per month in mortgage and Treasury bond purchases have kept interest rates down, encouraging businesses and individuals to borrow and spend money.
Powell also said long-term inflation prospects appeared on target for the Fed’s goal of going above 2% but that inflation was not poised to spiral out of control.
“Today, we see little evidence of wage increases that might threaten excessive inflation,” he said.
Powell did not specify a timeline for tapering, but judging by his comments it seems another couple strong jobs reports would trigger a decrease in bond purchasing by the end of the year. It would take a few months for that to translate to higher interest rates.
Powell has been careful to not make a hasty decision to withdraw help that could backfire in a fragile economy. Tapering “in response to factors that turn out to be temporary,” Powell said, “the ill-timed policy move unnecessarily slows hiring and other economic activity and pushes inflation lower than desired.”
The Fed has kept interest rates close to zero since March 2020 when the pandemic took hold in the U.S. and the attendant recession wreaked havoc on the economy.