Federal Reserve Chair Jerome Powell today said the Fed is drawing closer to ending its increased support for the markets as economic growth continues despite the ongoing spread of the delta Covid-19 variant.
The Fed announced its intention last month to keep inflation moderately above 2 percent until maximum employment is reached but indicated at that time that it might slow its robust support for the economy. The Federal Open Market Committee has opted to keep the target range for the federal funds rate at 0 to 0.25 percent and expects to maintain that until labor market conditions reach levels consistent with maximum employment and inflation rises to 2 percent and stays on track to moderately exceed that figure “for some time.” As of July, the national unemployment rate was 5.4 percent.
Last December, the committee indicated it would continue increasing its holdings of Treasury securities by at least $80 billion per month and of agency mortgage-backed securities by at least $40 billion per month “until substantial further progress has been made toward its maximum employment and price stability goals.” Since then, Powell said progress has been made, and the committee expects to continue assessing progress in coming meetings.
“We will be carefully assessing incoming data and the evolving risks,” Powell said at the Jackson Hole Symposium, held virtually again this year. “Even after our asset purchases end, our elevated holdings of longer-term securities will continue to support accommodative financial conditions.”
Fed support came after a significant portion of the U.S. economy was shuttered following the onset of Covid-19 in spring 2020, a recession that displaced 30 million workers in two months, twice the decline of the Great Recession. Since then, a quick recovery has ensued, and employment gains have been faster than expected. However, Powell said joblessness still disproportionately impacts low-salaried employees in the travel and leisure industries, a segment of the workforce especially hard-hit during initial stay-at-home orders.
Powell acknowledged that approach has led to a strong but uneven economy. Aggregate personal income rose, and household spending shifted to manufactured goods. Supply sides have been constrained, leading to durable goods inflation. Over the last 12 months, measures of headline and core personal consumption expenditures inflation have run at 4.2 percent and 3.6 percent respectively, well above the Fed’s 2 percent longer-term objective. Powell said that trend is likely to be temporary, citing “a relatively narrow group of goods and services that have been directly affected by the pandemic and the reopening of the economy.” Powell noted that used car prices have stabilized, which could lower inflation pressure if the trend continues.
Powell told the symposium that the labor market has considerably improved over the previous few months, adding 832,000 jobs, including nearly 800,000 in the services sector. Job openings and quits are at record levels, and long-term unemployment remains elevated, leaving employers scrambling to fill open positions. As of this month, total employment is still 6 million below the February 2020 level, and 5 million of those are in the service sector. Powell said the ending of unemployment benefits and school closures intended to combat the spread of the virus should help add even more jobs.