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The US economy and labor market have healed to the point that the central bank could begin to withdraw its stimulus measures by the end of the year, Federal Reserve Chair Jerome Powell said Friday.
But the Fed chief stressed that there was no hurry to raise interest rates, arguing that current inflation pressures will be temporary.
When Covid-19 hit the world's largest economy last year, the Fed jumped into action to prevent a major recession, slashing the key lending rate to zero and buying huge amounts of Treasury debt and agency mortgage-backed securities to provide liquidity to the financial system.
The pandemic recession was "the briefest yet deepest on record," Powell said in his highly anticipated speech to the annual Jackson Hole central banking symposium.
With millions of jobs recovered, he signaled that the Fed may ease the pace of bond buying from its current $120 billion per-month.
Powell provided no specifics, but instead repeated the Fed's stance that "it could be appropriate to start reducing the pace of asset purchases this year."
Any move to slow asset purchases would still leave a large amount of stimulus in place, and would not be a signal that an increase in the benchmark lending rate would soon follow, he said.
The timing of "rate liftoff" from zero will be subject to a "substantially more stringent test," Powell added.
- No 'ill-timed' move -
Widespread vaccinations have allowed businesses across the United States to reopen fully, bringing the unemployment rate down to 5.4 percent last month, much closer to the pre-pandemic level of 3.5 percent.
However, Powell said the recovery has further to go and the fast-spreading Delta variant of Covid-19 adds uncertainty.
He noted that total employment remains about six million positions below its February 2020 level "and five million of that shortfall is in the still-depressed service sector."
Meanwhile, prices have jumped as the economy restarted, pushing the central bank's preferred inflation gauge up to 4.2 percent annually in July, well above the long-term target of two percent.
The White House on Friday more than doubled its forecast for consumer price inflation this year, predicting a 4.8 percent annual increase, up from the two percent forecast in May.
But President Joe Biden's Office of Management and Budget expects consumer inflation to slow sharply by the end of next year to 2.6 percent.
Powell downplayed fears inflation could accelerate, noting that supply bottlenecks appear to be resolving and wage increases do not appear to be spilling over into prices.
Inflation is likely to decline as temporary pressures, like skyrocketing prices for used cars, recede, and Powell warned that moving to respond to factors that could prove to be temporary "may do more harm than good."
"The ill-timed policy move unnecessarily slows hiring and other economic activity and pushes inflation lower than desired," he said, warning that with the labor market still healing, "Such a mistake could be particularly harmful."
The Fed target aims to get inflation running at an average of two percent over time, which in practice means accepting higher prices for a short period.
Powell noted that inflation has fallen short of that goal for decades, but policymakers nonetheless will watch incoming data for signs high prices are becoming entrenched.
- 'Strategic plan' -
Veteran Fed-watcher Mickey Levy of Berenberg Capital Markets said Powell may have disappointed those waiting for a roadmap for the taper program, but his speech doubled down on the bank's focus on job gains.
"Clearly, the Fed is carrying through on its prioritization of maximum inclusive employment established in its new strategic plan, with a very loose interpretation of its tolerance of higher inflation," Levy said in an analysis.
Some Fed officials recently have indicated they want to end the bond-buying program quickly.
Gregory Daco of Oxford Economics said the Federal Open Market Committee making the decision is divided and likely to wait until its November meeting "to make a tapering announcement, and start reducing asset purchases in December or January."
Fed Vice Chair Richard Clarida seemed to be leaning that way, saying on CNBC later Friday that officials "will get a better read on the labor market, in particular, this fall."
"Clearly Delta does pose a downside risk to the outlook," Clarida said, and the central bank will have to "be attuned and attentive to the data" to see if the economy is slowing.