Fed chief Powell faces dilemma
WASHINGTON — Not long ago, anticipation was high that Federal Reserve Chair Jerome Powell might begin to sketch out a plan this week for the Fed to start pulling back on its support for an economy that has been steadily strengthening.
That was before COVID-19 cases began accelerating across the country. Now, the decision of how and when the Fed should begin dialing back its help for the economy has become a more complicated one.
Yet in outlining his view of the economy and the threats it faces in a high-profile speech Friday, Powell may provide important clues to the timing of changes in the Fed’s ultra-low-interest rate policies.
The big question has been when the Fed will begin to slow its purchases of Treasury and mortgage bonds. The Fed has been buying $120 billion in bonds each month since the pandemic erupted in March 2020 to try to keep longer-term rates low and encourage borrowing and spending. It has also pegged its short-term benchmark interest rate at nearly zero since then.
Powell will be speaking Friday at an annual conference of academics and central bankers. The conference, sponsored by the Federal Reserve Bank of Kansas City and normally held in Jackson Hole, Wyoming, will instead be a virtual-only event for a second straight year. A surge of COVID-19 cases near the Wyoming resort delivered a direct impact on the Fed itself by forcing a last-minute cancellation of its in-person plans.
The hasty shift to an online event reflects the rapid rebound of the pandemic, led by the delta variant, particularly in the South and Northwest. It follows a sharp decline in confirmed cases earlier in the summer that had raised hopes that the coronavirus and its economic impact might be fading.
Just a few weeks ago, many Fed officials were signaling that the economy was making solid progress toward the central bank’s twin goals of maximum employment and annual inflation at just above 2% for a sustained period. Several presidents of regional Federal Reserve Banks said they wanted to announce a reduction, or taper, of the bond purchases at the Fed’s next meeting.
Yet some economists have been slashing their forecasts for economic growth in the current July-September quarter. Restaurant traffic has declined slightly. Last week, Powell said it wasn’t yet clear what the delta strain’s impact on the economy would be. But he emphasized that the pandemic was far from over and was still “casting a shadow on economic activity.”
With the economic picture hazier now, economists will be listening carefully for clues Powell may provide about the Fed’s intentions.
“I’ll be watching how he characterizes current conditions and the outlook he has for the economy,” said Ellen Gaske, an economist at PGIM Fixed Income. “That will give us a sense of how soon the tapering will occur.”
The uncertainties raised by the delta variant make it likelier that the Fed will announce a tapering in November or later, economists said, rather than in September. That would allow Fed officials to consider two additional months of data on inflation and jobs to gauge the delta variant’s impact.
The resurgence of the virus is hardly the only complicating factor facing the Fed. Inflation has surged to a three-decade high as a rebound in consumer spending and shortages in many commodities and parts, such as semiconductors, have sent prices rising for airline tickets, hotel rooms, new and used cars and restaurant meals.
