Federal Reserve to Limit Bond Purchases Later This Year to Encourage Borrowing, Spending

In a virtual speech given to an annual gathering of central bankers on Friday, Federal Reserve Chair Jerome Powell announced the baking system will start pulling back its low-rate policies later this year, so long as hiring continues on a positive trend.

However, the decision could cause increases in borrowing costs over time for mortgages, credit cards and business loans. The Fed has purchased $120 billion a month in mortgage and Treasury bonds in an attempt to hold down long-term loan rates and encourage borrowing and spending.

Powell suggested that the Fed will probably announce a reduction of those purchases within the last three months of 2021.

The chair assured bankers that the tapering does not mean the Fed will start raising its benchmark short-term rate, which has hovered around zero since the onset of the pandemic-induced recession in March 2020. The increases are planned for when the Fed finishes tapering its bond purchases.

For more reporting from the Associated Press, see below.

Federal Reserve Building
People take pictures of the Federal Reserve building in Washington, DC on August 6, 2021. Chair Jerome Powell announced Friday that the Fed will start dialing back its ultra-low-rate policies this year as long as hiring continues to improve. Daniel SLIM / AFP/Getty Images

But Powell said inflation has risen enough to meet its test of "substantial further progress" toward the Fed's goal of 2 percent annual inflation over time, which was necessary to begin tapering. There has also been "clear progress," he said, toward the Fed's goal of maximum employment.

At the same time, the Fed chair said the central bank is monitoring the economic impact of the highly contagious delta variant, which has caused a sharp spike in COVID-19 cases in the United States, especially in the South and West.

"While the delta variant presents a near-term risk, the prospects are good for continued progress toward maximum employment," Powell said. He spoke via webcast to the Jackson Hole Economic Symposium, which is being held virtually for a second straight year because of COVID-19.

A sharp jump in inflation has put the Fed's ultra-low-interest rate policies under growing scrutiny, both in Congress and among ordinary households that are being squeezed by surging prices. Inflation, according to the Fed's preferred gauge, rose 3.6 percent in July compared with a year earlier, the biggest increase in three decades. The month-to-month increase slowed from 0.5 percent to 0.3 percent.

In his speech, Powell underscored his longstanding view that while inflation has surged, causing difficulties for millions of Americans, the price acceleration should ease once the economy further normalizes from the pandemic and supply shortages abate. History, he said, suggests that the Fed should not overreact to temporary price spikes by undoing its support for the economy too aggressively. Doing so could weaken job growth.

If the Fed were to reduce its stimulus "in response to factors that turn out to be temporary," the Fed chair said, "the ill-timed policy move unnecessarily slows hiring and other economic activity and pushes inflation lower than desired."

Powell also noted that while average wages have risen, they haven't increased enough to raise fears of a "wage-price spiral," as occurred during the ultra-high-inflation 1970s.

"Today," he said, "we see little evidence of wage increases that might threaten excessive inflation."

Most Fed officials said at their last meeting in late July that inflation had met their goal of making "substantial further progress" toward topping 2 percent for some time. If the economy continued to improve, most officials said it would be appropriate to begin reducing the Fed's bond purchases later this year, according to minutes from the meeting released last week.

Complicating the situation, the resurgence of the pandemic, led by the delta variant, has confounded the Fed's expectations that the economy and job market would be on a clear path to improvement by this fall. The delta variant could slow spending in such areas as air travel, restaurant meals and entertainment.

Fed officials also hoped that many factors discouraging Americans from seeking jobs, such as fear of catching the virus, would begin to dissipate this fall and boost job gains. Instead, the delta variant may renew those fears and potentially postpone the point at which the Fed can gain a clear read on the job market.

Jerome Powell
FILE - In this Wednesday, Sept. 26, 2018 file photo, Federal Reserve Chairman Jerome Powell speaks during a news conference in Washington. The strengthening U.S. economy is edging closer to achieving the Federal Reserve's goals for job growth and inflation, Chair Jerome Powell said in a speech in which he offered few clues to a key question overhanging the economy: When will the Fed begin to withdraw its extraordinary economic support? Susan Walsh, File/AP Photo