U.S. Fed should begin tapering, but not raise rates, chair says

Federal Reserve chair Jerome Powell on Friday said the U.S. central bank should start the process of reducing its support of the economy by cutting back on its asset purchases, but should not yet touch the interest-rate dial.

“I do think it’s time to taper; I don’t think it’s time to raise rates,” Mr. Powell said in a virtual appearance before a conference, notingthattherearestillfivemillionfewerU.S. jobsnow than there were before the coronavirus pandemic. He also reiterated his view that high inflation will likely abate next year as pressures from the pandemic fade.

“We think we can be patient and allow the labour market to heal,” he said.

The Fed has promised to keep its benchmark overnight interest rate at the current near-zero level until the economy has returned to full employment and inflation has reached the central bank’s 2-per-cent goal and is on track to stay moderately above that level for some time.

It’s “very possible” the Fed’s full employment goal could be met next year, Mr. Powell said on Friday, if supply-chain constraints ease as expected and the service sector opens more fully, allowing job growth to speed back up. Job gains slowed sharply in August and September as COVID-19 cases surged.

Still, it’s not a certainty, and if inflation – already higher and lasting longer than initially expected – moves persistently upward, the Fed would “certainly” act, he said.

“Our policy is well positioned to manage a range of plausible outcomes,” Mr. Powell added. “We need to watch, and watch carefully, and see if the economy is evolving consistent with our expectations, and adapt policy accordingly.”

The remarks appeared to open the door to a possibility Fed officials dread: needing to raise interest rates to prevent inflation from spiralling out of control and, by doing so, cutting short the jobs recovery.

Mr. Powell said he doesn’t see that as the current situation, but he does see agrowing tension between the Fed’s two mandates of full employment and stable prices.

“The risks are clearly now to longer and more persistent bottlenecks and, thus, to higher inflation,” he said. For now, the Fed needs to “look through” that high inflation, despite the pain it means for households, in order to give time for the economy to work out supply kinks.

The Fed has signalled it will likely begin next month to taper its US$120-billion in monthly purchases of Treasury bonds and mortgage-backed securities.