“As vaccinations rise, schools reopened, and increased unemployment benefits phased out, some of the factors that may hold job seekers back will fade,” Powell said. “While the delta variant poses a short-term risk, the prospects for further progress towards maximum employment are good.”
Powell made it clear that even if the Fed begins to slow its bond purchases, that does not mean it is about to hike rates, saying that there is “a lot of ground to cover” as the labor market recovers.
“It is best for Fed policy that he be as open as possible without scaring anyone, which is also best for him politically,” said Diane Swonk, chief economist at Grant Thornton, before the speech.
Biden’s presidency is based on his promise to both defeat the virus and restore the economy to pre-pandemic strength, and Powell has been instrumental in helping the president with both his words and billions in aid to the markets. Any misstep at the conference – which in the past has served as the arena for some of the Fed’s deepest policy changes – would have come at a particularly sensitive time for the Fed chair, as the decision on his re-appointment is expected to be announced as early as next month .
The bond buying process is designed to lower long-term rates, make borrowing cheaper, and encourage investors to take more risk, which ideally will drive overall growth.
Powell has been criticized by a number of progressive groups who loudly urged the central bank not to act aggressively to remove support before the benefits of the rebound were more widely felt. The Fed-Up campaign, a coalition of workers and community groups, argues that it is too early to withdraw or “cut back” their purchases this year.
“Why are we talking about the Fed’s ‘rejuvenation’ and ‘substantial progress’ when working people are just beginning to sense the economy is getting better?” The group said in a statement.
Fed Up said Powell needed to be more specific about how the program would improve the economy for low-income workers, particularly minorities who have been hit by central bank policies in the past, including raising interest rates too early to stave off inflation.
“The Fed fell significantly short of its efforts prior to the COVID crisis, particularly with the 2015 rate hike,” the group said. “They confirmed that. Powell has to say how they will make up for the extent of this mistake in the future. “
However, senior White House business leaders who stress the importance of the Fed’s independence also want the central bank to gently and slowly scale back its bond purchases.
But there is also pressure from the Republicans and Senator Joe Manchin (DW.Va.) on the Fed to curb its economic stimulus, as inflation has continued to rise in recent months due to pandemic-related bottlenecks and asset prices for houses and stocks shot up.
However, Powell is unlikely to receive an angry reaction as he once did from President Donald Trump. After the Jackson Hole conference in 2019, Trump tweeted, frustrated that the Fed was not cutting interest rates any faster, “Who’s our bigger enemy, is it Jay Powell?” [Chinese President] Xi [Jinping]? “
Taking a hands-off approach, Biden said last month that the Fed should “take whatever steps it deems necessary to support a strong, lasting economic recovery,” while some government officials privately praised Powell’s work to have. Treasury Secretary Janet Yellen has told senior White House officials that she believes Powell deserves a second term, according to two people familiar with the matter.
As both prices and employment gains pick up, the central bank has started to signal more clearly that it will start slowing its asset purchases at some point this year. Contrasted with the so-called taper tantrum in 2013, when markets panicked after then-chairman Ben Bernanke proposed plans to gradually reduce the Fed’s financial crisis-era bond purchases before declining quickly.
Ellen Zentner, US chief economist at Morgan Stanley, said Powell’s main role in the speech was not to surprise investors with suggestions about how much and how quickly it would withdraw its bond purchases.
“You don’t want to turn things around when market expectations are exactly where you need them,” she said.
For now, Powell could only go so far as to commit to one course of action while the pandemic is rife. The central bank would like more progress in the labor market – in line with the latest strong monthly job reports – but fewer workers could be available to take jobs in the fall if schools don’t fully reopen, forcing more parents to Stay at home.
“The intervening month [since July] has brought further progress in the form of a strong employment report for July, but also the further diffusion of the Delta variant, ”said Powell. “We will carefully evaluate incoming data and the evolving risks.”
Ben White contributed to this report.