The Federal Reserve will likely taper off its bond purchases before considering raising interest rates, Chairman Jerome Powell said.
“We will reach the time at which we will taper asset purchases when we’ve made substantial further progress toward our goals from last December, when we announced that guidance,” Powell said Wednesday in a virtual event hosted by the Economic Club of Washington. “That would in all likelihood be before — well before — the time we consider raising interest rates. We haven’t voted on that order but that is the sense of the guidance.”
Policy makers will wait until inflation has reached 2% sustainably and the labor-market recovery is complete before considering lifting interest rates, and the combination is unlikely to happen before 2022, he said. Their forecasts last month signaled rates being held near zero through 2023.
“When the purchases go to zero, the size of the balance sheet is constant, and when bonds mature you reinvest them,” Powell said. “And then another step — and we took this late in the day in the last cycle — was to allow bonds to start to runoff. And we haven’t decided whether to do that or not.”
Powell added that he doesn’t think the Fed would actually sell bonds into the market, something it also didn’t do during the recovery from the 2008 financial crisis.
Powell and his colleagues have pledged to be patient and maintain aggressive monetary policy support, even as the economic recovery from the pandemic picks up speed. That dovish view has helped U.S. stocks reach fresh record highs. Recent data has also painted a brighter picture as vaccinations spread and the economy reopens, with employers adding 916,000 jobs in March.
“Most members of the committee did not see raising interest rates until 2024, but that isn’t a committee forecast, it isn’t something we vote on or act on as a group — it really is just our assessment,” Powell said. “Markets focus too much on what we call the economic predictions, and I would focus more on the outcomes that we’ve described.”
Fed policy makers substantially lifted their growth and employment forecasts at the central bank’s meeting last month. Their median estimate sees the economy expanding 6.5% this year and the unemployment rate declining to 4.5% by the end of 2021.
Powell said the U.S. is going into a period of faster growth and job creation, and that the main risk is another spike in COVID-19 cases due to virus strains that may be more difficult to treat.
The Fed chair said it would be wise to keep wearing masks and stay socially distanced “at least for a while longer.”
Minutes of the central bank’s March meeting released April 7 said policy makers expect it will likely be “some time until substantial further progress” was made on employment and inflation. That refers to the tests they’ve set for scaling back bond purchases of $120 billion a month.
