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Federal Reserve Chief Powell Backs Tapering This Year; S&P 500 Rises

Federal Reserve chief Jerome Powell said Friday that he was among the majority of policy committee members at the July meeting inclined to start tapering asset purchases this year. That suggests a strong chance the Fed will announce the forthcoming policy change at its Sept. 21-22 meeting. Still, the S&P 500 gained ground on Powell’s soothing inflation message, with the Nasdaq composite hitting a new record.




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Since the last policy meeting, Powell noted, that there’s been “more progress,” with July’s employment report showing a gain of 943,000 jobs as the unemployment rate fell to 5.4%. However, he said the Fed will continue to assess incoming data and evolving risks, amid the further spread of the delta Covid variant.

Federal Reserve May Look Past Covid Spike

Still, as long as robust hiring continues, the Federal Reserve may be willing to look past the latest Covid spike. Further vaccine uptake, booster shots and, perhaps by year end, vaccinations of children under age 12, should get things under control.

A September announcement that tapering will begin in December would seem to fit the Fed’s guidance for plenty of advance notice. Powell also stressed that tapering would be done gradually. Wall Street economists generally assumed the Fed would draw down purchases over 12 months. However, some Fed policy makers have indicated a desire to taper somewhat faster.

The speed of tapering matters because analysts don’t expect the Federal Reserve to begin hiking its benchmark interest rate until it completes tapering. If it winds down purchases faster, that would therefore open the door launching rate hikes earlier.

Nasdaq, Treasury-Yield Action

The S&P 500 rose 0.7% and the Dow Jones 0.6% after release of Powell’s Jackson Hole conference speech at 10 a.m. ET. The Nasdaq climbed 0.9% to 15,076, surpassing Wednesday’s all-time record.

Wall Street may have put more emphasis on Powell’s benign inflation message than his desire to start tapering.

The 10-year Treasury yield slipped 3 basis points to 1.33%

Fed’s Powell Still Dovish On Rates, Inflation

While Powell indicated that he’s no longer in the dovish camp with regards to tapering, he did sound pretty dovish about the path of inflation and rate hikes.

Powell made a case that inflation will fall back close to the Fed’s 2% goal. The latest data shows the Fed’s preferred inflation gauge, the core personal consumption expenditures price index, held at 3.6% from a year ago in July. Overall inflation, including food and energy, rose to 4.2%.

Federal Reserve Vice Chair Richard Clarida said in an Aug. 4 speech that he expects the central bank’s maximum employment test to be met by the end of 2022. He also sees inflation risk to the upside. At the July meeting, policy makers indicated they expect that two rate hikes will be appropriate in 2023.

The Fed said late last year that it would wait for “substantial further progress” toward its goal of maximum employment and price stability before slowing its $120-billion in monthly purchases of Treasuries and government-backed mortgage securities.

In his July 28 press conference, Powell said progress had been made but “we have some ground to cover” before clearing the “substantial” bar. Fed meeting minutes published earlier this month showed a majority of committee members backed the start of tapering by year-end, assuming continued progress.

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