Fed Chair Powell hints that bond tapering policy will roll out by the year-end

Federal Reserve Chairman Jerome Powell indicated on Friday, that the central bank was likely to initiate bond tapering by the end of this year.

At the Fed’s annual Jackson Hole, Wyoming symposium, the Fed Chair announced that Fed would trim its bond-buying program before the end of this year as long as economic growth continues.

In a set of prepared remarks, the Fed Chair assured everyone that tapering wouldn’t immediately be followed by an increase in interest rates. “The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test,” he stated.

The central bank has been buying $120 billion monthly in Treasury and mortgage-backed securities (MBS), every month since the start of the pandemic to provide additional stimulus. It also slashed its short-term benchmark interest rate to near zero.

Despite that, the U.S. economy has witnessed its biggest inflation surge in decades, along with strained supply chains, temporary shortages, and a rebound in travel. Core inflation, which excludes volatile food and energy prices, rose 3.6% in July from a year earlier.

The Fed Chair admitted that the inflation was a cause of concern, but reiterated the central bank’s message that it was likely to be transitory. He said that the current surge in prices “is so far largely the product of a relatively narrow group of goods and services that have been directly affected by the pandemic and the reopening of the economy” and should cool down soon.

Powell highlighted the risk that downward pressures on inflation, such as those observed over the last decade, could reassert themselves once the pandemic ends. He dismissed the fears of a possible “wage-price spiral,” where a salary increase might threaten excessive inflation.

The Fed Chair noted that the delta variant of COVID-19 “presents a near-term risk” to getting back to full employment, but he insisted that “the prospects are good for continued progress toward maximum employment.”

The markets reacted positively to Powell’s comments as major stock indexes rose to record highs while government bond yields moved lower.

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