US Federal Reserve chief Jerome Powell promised to give markets plenty of advanced notice before relaxing QE
But the Fed leader stressed that there was no hurry to raise the benchmark lending rate in response to temporary inflation pressures.
In his highly anticipated speech to the annual Jackson Hole central banking symposium, Mr Powell said despite the impact of the Delta variant of Covid-19, the economy has continued to recover and show strong job growth.
While inflation is currently running at a high 4.2% annually as of July, Mr Powell said it was likely to decline as temporary pressures, like skyrocketing prices for used cars, recede.
He warned that moving to respond to temporary inflation pressures “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 recovering, “Such a mistake could be particularly harmful.”
Any move to taper the pace of bond buying would still leave a large amount of stimulus in place, he added.
Mr Powell did not provide details of the taper plans, but instead repeated the Fed’s stance that “it could be appropriate to start reducing the pace of asset purchases this year.”
Earlier Kansas City Fed Bank President Esther George, host of the Jackson Hole conference and considered an inflation hawk, said that the strong data suggest “there’s an opportunity to begin to dial back on asset purchases.”
But in an interview on Fox Business Network, she hinted that the details may have to wait for “the communication coming out of our September meeting.”
Organisers intended to return the conference to its usual in-person format, but due to rising Covid-19 infections announced this week it would be held virtually for the second year in a row.
Mr Powell’s biggest concern is executing tapering without a repeat of the freak-out seen the last time the central bank tried the maneuver following a crisis.
The Fed first resorted to bond buying – known as quantitative easing (QE) – after the financial system froze up in the 2008 global economic downturn.
But when then-Fed chief Ben Bernanke in 2013 merely suggested the time was approaching to start to slow QE, markets rebelled, forcing a delay in the central bank’s normalisation efforts.
Former Fed chief Ben Bernanke
Mr Powell has repeatedly promised to give markets plenty of advanced notice before relaxing purchases, but doing so will not be easy.
“The best way to prevent a taper tantrum is to lay out a road map for tapering, with off ramps if variants do more to disrupt demand than supply chains,” she said.
But “he can’t ignore those risks and barrel ahead with tapering,” she added.