Fed's Powell: Economy has made ‘clear progress’ toward Fed's employment goal, keeping Fed on track to taper bond purchases this year

Federal Reserve Chair Jerome Powell said Friday the economy has made “substantial further progress” toward the Fed’s inflation target and “clear progress” toward its goal of full employment, keeping the central bank on track to reduce its bond-buying stimulus this year.

And while Powell said July’s strong jobs report solidified that view, he added, “the further spread” of COVID-19’s delta variant poses a risk.

Yet, he generally downplayed the significance of that risk, keeping the Fed on course to start tapering down its market-friendly, bond-buying program later this year. 

“While the delta variant presents a near-term risk, the prospects are good for continued progress toward maximum employment,” Powell said at the Fed’s annual conference in Jackson Hole, Wyoming, conducted virtually for the second straight year. 

Since spring of last year, when the pandemic upended the economy, the Fed has been buying $120 billion a month in Treasury bonds and mortgage-backed securities to hold down long-term interest rates and stimulate the economy until “substantial further progress” has been made toward its goals of full employment and 2% inflation.

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In the early days of COVID-19, the Fed also slashed its benchmark interest rate to near zero. Powell said the Fed isn’t close to raising that and scaling back the bond purchases doesn’t send a signal about the timing of the first rate hike.

At the Fed’s last meeting in late July, Powell said Friday, “I was of the view, as were most participants, that if the economy evolves broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year.”

“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.”

Minutes of the Fed’s July 27-28 meeting, released last week, revealed that most Fed officials expected the Fed to begin tapering the bond purchases this year, sooner than economists had anticipated. But this marks the first time Powell has acknowledged he’s among that group.

At the same time, Powell gave no hint that the Fed is on the verge of tapering the bond purchases, making it unlikely the central bank will announce the tapering at a meeting next month, says economist Paul Ashworth of Capital Economics.

The economy added a booming 943,000 jobs in July following 938,000 additions in June. Prior months brought healthy payroll increases, but they fell short of the roughly 1 million a month jobs that many economists predicted amid worker shortages and supply-chain bottlenecks.

The strong job gains appear to show that the labor shortages are starting to ease.

Much of the crunch is expected to improve next month as enhanced unemployment benefits run out across the country, encouraging more Americans to look for jobs. In addition, schools have opened in some states and will reopen in others, allowing parents who have been caring for kids at home to search for work.

Meanwhile, the Fed’s preferred measure of annual inflation recently hit 4.2%, well above its 2% target. Powell reiterated that Fed officials believe prices have shot up for pandemic-related items, such as a surge in spending for hotels and airplane tickets, but the increases have not spread to a broader range of products and services. As a result, he said, Fed officials continue to believe the inflation spike is temporary.

In fact, Powell said used car prices, which have soared because of health crisis-related supply chain problems, already are starting to stabilize and prices of other goods also may be starting to fall.

Since rate hikes, or bond purchases, affect the economy with a lag of as much as a year or more, a rate increase to address a temporary surge in inflation could slow hiring and other economic activity and push inflation "lower than desired," Powell said.

With many Americans still out of work, "such a mistake could be particularly harmful," Powell said. 

Generally, Fed officials have been looking to boost inflation toward the Fed’s 2% goal for years, with price increase running well below that level because of long-term shifts such as globalization and discounted online shopping.

Powell, meanwhile, said the Fed has stricter criteria for raising its key interest rate from near zero. The economy must reach full employment and inflation needs to top the Fed’s 2% goal “for some time.”

Full employment amounts to the lowest unemployment can reach – likely just under 4% – without triggering excessive inflation.

“We have much ground to cover to reach maximum employment, and time will tell whether we average 2% in‘‘’flation on a sustainable basis,” he said.

Some leading economists expect the Fed to start raising its benchmark rate in 2023.

‘clear progress’