Taper time: US Fed chief says bank should reduce asset purchases

Federal Reserve Chair Jerome Powell said on Friday that the United States central bank should begin reducing its asset purchases soon, but should not yet raise interest rates because employment is still too low and because high inflation will likely abate next year as pressures from the COVID-19 pandemic fade.

“I do think it’s time to taper; I don’t think it’s time to raise rates,” Powell said in a virtual appearance before a conference. “We think we can be patient and allow the labour market to heal.”

That outlook, Powell emphasised, is only the most likely case, adding that if inflation – already higher and lasting longer than expected – moves persistently upward, the Fed would act.

“Our policy is well-positioned to manage a range of plausible outcomes,” he said.

The Fed is on the cusp of beginning to withdraw some of its crisis-era support as it indicates it will taper its $120bn in monthly purchases of Treasury bonds and mortgage-backed securities, a move it has signalled it could make next month.

The central bank, however, is facing a delicate balancing act in its dual mandate to seek full employment and stable prices.

Consumer prices have been rising at more than twice the Fed’s two percent target rate, but employment is still well below the pre-pandemic level.

And, Powell noted, “supply constraints and elevated inflation are likely to last longer than previously expected and well into next year, and the same is true for pressure on wages.”

The most likely case is for inflation pressures to abate and job growth to resume its pace from this past summer, he said, but “if we were to see a risk of inflation moving persistently higher, we would certainly use our tools.”

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

“While the time is near for tapering our asset purchases, it would be premature to tighten policies using rates now, with the effect and intent of slowing job growth,” Powell said. “There is good reason to expect that we’ll return to robust jobs growth and for the supply constraints to diminish, both of which we would have the effect of increasing potential output of the economy.”