Powell says Fed could tighten money policy this year, downplays inflation risks

Federal Reserve Chairman Jerome Powell said the central bank could begin reversing its easy-money policies as soon as this year — and predicted that inflation, while a concern, is temporary and will subside in the coming months.

Speaking at the Kansas City Federal Reserve Bank’s annual symposium, Powell emphasized the employment gains and economic recovery and said, “It could be appropriate to start reducing the pace of asset purchases this year.”

Powell added that tapering the $120 billion in monthly bond buying shouldn’t hurt the economy. “Even after our asset purchases end, our elevated levels of long term securities holding will continue to support accommodative financial conditions,” he said.

Powell did not say when the Fed will hike interest rates — a topic of discussion at the Fed’s meeting on Sept. 21 — but suggested it won’t be imminent. Before raising rates, Powell said the Fed would look to hold inflation at 2 percent and make sure the gains in employment numbers hold.

“The timing and pace of the coming reduction in asset purchases is not intended to be a direct signal as to the timing of any future interest rate increases,” Powell added.

Powell’s speech comes as the debate over inflation and bond buying reaches a fever pitch. On Thursday and Friday, four separate Federal Reserve officials called for an end to the policy as inflation surges.

The meeting, which is typically held in Jack𒉰son Hole, Wyoming, was held virtually for the second year in a row. Conference organizers announced just last week they were shifting from an in-person event to a virtual format amid fears of the ultra-contagious Delta variant.

The newest surge in coronavirus cases complicated both the conference and the Fed’s plans to slow down the pace of bond-buying and possibly raise rates. Still, Powell said he believes Delta is only a “near-term” risk.

Friday morning, president and CEO of the Federal Reserve Bank of Cleveland Loretta J. Mester said in a CNBC interview, “We just don’t need the same kind of accommodation that we needed at the height of the crisis and I’m comfortable that we’ve met our conditions.”

Powell spent much of his speech discussing inflationary concerns and noted that responding to inflation “may do more harm than good” given that inflation is often “temporary.”

“Inflation at these levels is, of course, a cause for concern. But that concern is tempered by a number of factors that suggest that these elevated readings are likely to prove temporary,” he said.

Market watchers were paying close attention to Powell’s remarks — and seemed largely pleased with his message. Following his speech, the Dow Jones industrial average on Friday was recently up more than 227 points at 35,440.50.