This year’s annual Federal Reserve conference comes during a contentious economic time in American History. While the price of homes and cost of living continue to skyrocket, millions of American jobs remain vacant, and a new variant of the coronavirus threatens our plan for a smooth recovery. Today, Chair of the Federal Reserve, Jerome H. Powell, has decided to keep the current pace of purchasing assets, despite concerns about excessive inflation.
In the past few weeks, the hawkish wing of the Federal Reserve has been urgently pressuring the central bank to taper bond purchases on “unnecessary” asset purchases. St. Louis Federal Reserve president James Bullard has repeatedly called for The Fed to ease its monthly bond purchases of $120 billion and end the program completely by the beginning of next year. The central bank has kept up with this pace of purchasing government-backed bonds since the pandemic began in March 2020, and kept the interest rate near zero.
During last year’s conference, at the Jackson Hole economic symposium, Mr. Powell announced that Fed officials would no longer raise the interest rate solely because unemployment was falling and inflation was expected to rise. Instead, The Fed would base its policy decision on hard proof that inflation was rising well above the 2% level.
However, the pandemic induced massive government spending in the form of stimulus checks and artificially low interest rates due to an uneven balance of supply and demand.
Now the burden of proof lies on Mr. Powell, who must prove that the economy is still in need of large-scale assistance from The Fed. Currently, most Fed officials, including Mr. Powell himself, believe tapering is eventually necessary, but the debate is all about timing. If inflation remains high and a slow-moving Fed has to rapidly correct their course to contain it, the economy could spiral into a painful recession.
On the other hand, if The Fed withdraws their support too early, then the economy could take longer to heal and investors would lose trust in Mr. Powell’s promise to raise inflation and develop an inclusive labor market.
“Inflation in these levels is, of course, a concern,” Mr. Powell explained. “But that concern is tempered by a number of factors that suggest these readings are likely temporary.” He went on to state that much of the inflation within the past 12 months can be attributed to rebounding prices, which previously declined at the start of the pandemic recession. He concludes that these effects should wash out over time.
Mr. Powell also dispelled concerns over the rise in wages adding to inflation. Rather, wage increases are consistent with the long-term inflation objective, though The Fed will continue to monitor this carefully. Additionally, supply and demand balance are improving, particularly in goods and service prices most affected by the pandemic.
Mr. Powell concluded by saying, “The committee remains steadfast in our oft-expressed commitment to support the economy for as long as it is needed to achieve a full recovery. The changes we made last year to our monetary policy framework are well-suited to address today’s challenges... The Fed will continue to purchase assets at the current pace until they see substantial progress in reaching maximum employment and price stability goals.”
Even after The Fed decides to reduce asset purchases, their elevated holding of longer-term securities will continue to support and accommodate financial conditions of the American people. “The timing and pace in reducing asset purchases will not carry a direct signal to the timing of interest rate lift-off,” Mr Powell warns. “This will be dependent on a different and substantially stringent test.”
For more information about The Federal Reserve annual conference, including a full transcript of the event, please visit https://www.federalreserve.gov/newsevents/calendar.htm.
