Home » The Fed is preparing to withdraw stimulus. Powell: “Appropriate to reduce purchases this year”

The Fed is preparing to withdraw stimulus. Powell: “Appropriate to reduce purchases this year”

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MILANO – The governor of the Federal Reserve, Jerome Powell, gives a “strong signal” (reading the Financial Times) on the intention of the American Central Bank to begin withdrawing extraordinary stimuli from the US economy. Powell explains from the Jackson Hole Kansas City Fed Symposium that it is “appropriate” “to start the tapering from this year “, or the gradual reduction in purchases of securities that – at the rate of 120 billion dollars a month – Washington is pumping into the economy to bring it back out of the coronavirus crisis.

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Recalling the central bank discussions at the last meeting in July, Powell clarifies that “I was of the opinion, like most of the participants, that if the economy had followed the expected evolution, it would have been appropriate start slowing down the pace of asset purchases this year “. It therefore confirms the Fed’s willingness to start a tapering of its interventions, also because subsequent data” have seen further progress “on employment. However, the unknown factor remains of the” further spread of the Delta variant “:” We will evaluate carefully the incoming data and the evolving risks “he explains. Powell then confirms that” even after the end of our asset purchases “the sizeable package of securities in the ‘belly’ of the Fed” will continue to support accommodating financial conditions “.

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A scenario that analysts expected, especially after reading the minutes of the July meeting and seeing the mounting pressure from the “hawkish” governors who are pushing to cool the economy. What the analysts doubted was that they had an indication already from the expected Jackson Hole summit: in the last days the forecasts of the investment banks were pointing to a Powell wait for, which might have given some vague hint of a future announcement, but they were counting on the September meeting for the clearest words.

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During the night, the interventions of some exponents of the “hawks” faction, in favor of a start of tapering already in the autumn, worried the markets, while the rumors about the possibility that the Biden administration is in favor of a second term for Powell reassured the investors on maintaining continuity in the Fed’s strategy. On the other hand, the price data arrived just minutes before Powell’s speech: inflation in the US it increased in July. The measure preferred by the Fed to calculate it, the PCE (personal consumption expenditures price index), grew by 0.3% compared to the previous month, in line with estimates, and compared to a year earlier it increased by 4.2%. , the biggest increase since 1991. The + 1.1% of personal income in July is above estimates, while consumer spending is below.

Powell weighed his speech by giving notice of the next steps but also recalling the necessary prudence for too many uncertainties, thus assuring investors that there will be no sudden moves like when – in 2013 – the Fed’s policy change threw the markets into turmoil.

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If on the side of the prices the progress of the US economy is evident, and indeed the flare-up at current levels for Powell “causes concern” despite the belief that “the increase will be temporary”, on the side of the labor market (another point of reference for the decisions of the Fed) the governor explained that “it has improved more than expected, but unemployment remains too high”. Even the expansion of the Delta variant, compared to the July meeting, is a factor that Powell points his finger at as a reason for caution. The call to caution therefore remains in the governor’s words: “The American economy has made ‘clear progress’ but ‘weaknesses’ in the labor market remain: in this context, an inopportune and untimely move in monetary policy could slow down economic activity. “. A message that therefore on the one hand strongly opens up to the reduction of stimuli, but guarantees the markets that soft landing that should avoid dangerous jolts.

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And with the same intent Powell still remembers that “a reduction in asset purchases” is disconnected from the future path of interest rates interest rate: “This is not a direct signal of an upcoming rate hike.” For this to happen, it takes some time for Powell to verify that the inflation target of 2% – although it is now exceeded – has been achieved on a sustainable basis and not just on a temporary basis; è there is still a long way to go to reach the other goal, that of maximum employment. Says the US governor again: “The lessons of history and careful attention to incoming data and evolving risks offer useful guidance for the unique challenges of today’s monetary policy. We will continue to monitor inflation inflation data.” , ensures.

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