WASHINGTON, Aug 26 (Reuters Breakingviews) – A calming prairie landscape would be a good Zoom backdrop for Jerome Powell’s virtual speech on Friday. The annual Federal Reserve confab, once again forced online from its traditional Jackson Hole, Wyoming, location, is usually a place to make news, as the U.S. central bank chair did in 2020. Now amid a Covid-19 resurgence, it’s an occasion to avoid surprises.
Powell made a big splash at the Kansas City Fed-sponsored conference last year. He announced that the Fed had adopted “average inflation targeting,” meaning it will allow prices to run moderately above its 2% goal for some time. So even if the unemployment rate falls, the central bank may not raise interest rates as long as inflation remains controlled, a policy that Powell acknowledged may be counterintuitive.
This year, Powell has to pull off a balancing act. The Fed has been buying $120 billion of bonds each month to support the U.S. economy through the pandemic. This year’s burgeoning recovery has pushed inflation higher than expected, in part because of comparisons to a period last year when the economy was shut down and because of supply-chain hiccups that have forced up prices for certain products like used cars. The consumer price index rose 5.4% in July from a year earlier.
The minutes of the Fed’s rate-setting committee meeting in July showed that most participants thought asset purchases could be reduced starting this year. Investors want to know when and how so-called tapering will begin, and how it might transition into interest-rate increases. When the Fed wound down the stimulus program that ended in 2014, it shrank its purchases over 10 months and waited more than a year before raising rates.
Then-Chair Ben Bernanke rocked markets before that process began in 2013 by saying the Fed would reduce its bond buying earlier than expected. Powell won’t want to trigger any similar “taper tantrum.” Meanwhile the delta variant of the coronavirus has started to damp economic activity again, with recent retail sales and consumer sentiment weakening.
As an added challenge for Powell, he is also auditioning for a possible nomination for a second term as Fed chair if President Joe Biden’s administration likes what it hears. Reassuring investors on tapering and rates while giving the central bank needed wiggle room will be a test of his skills.
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– U.S. Federal Reserve Chair Jerome Powell is scheduled to speak on Aug. 27 at the annual economic policy conference hosted by the Federal Reserve Bank of Kansas City. The theme of the event this year is “Macroeconomic Policy in an Uneven Economy.” On Aug. 20, the Kansas City Fed announced that the planned in-person conference at Jackson Hole, Wyoming, would instead be held virtually because of Covid-19 health risks.
Editing by Richard Beales and Marjorie Backman
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