Jay Powell sought to stamp out fears that the Federal Reserve would begin winding down its asset purchases later this year, saying the central bank was far from considering an “exit” from its ultra-loose monetary policies.
Speaking at a virtual event hosted by Princeton University on Thursday, Mr Powell said the Fed knew it had to be “very careful in communicating about asset purchases” because of the “real sensitivity” among investors about the potential withdrawal of central bank support for the economy.
“Now is not the time to be talking about exit,” Mr Powell said. “[One] lesson of the global financial crisis is: be careful not to exit too early and by the way, don’t try to talk about exit all the time . . . because the markets are listening.”
The Federal Reserve chairman added that when the central bank had “clear evidence” of progress towards its goals on employment and inflation, it would “let the world know” about its asset purchase policies.
“We will communicate very clearly to the public and we will do so . . . well in advance of active consideration of beginning a gradual taper of asset purchases,” he said.
Comments by several regional Fed presidents since the start of the year had fanned speculation that the US central bank may consider winding down its asset purchase programme as early as this year.
The remarks rattled investors, who had assumed the policy would stay in place until 2022 at the earliest, and helped to accelerate a sell-off in US government bonds that began following two run-off elections in Georgia last week that tipped control of the Senate to the Democratic party.
Mr Powell’s assurances follow similar remarks from Richard Clarida, vice-chairman, and Lael Brainard, governor, this week, underscoring that the Fed is in no rush to pull back its support, and wants to avoid a repeat of the “taper tantrum” that rattled markets in 2013 after its last long bout of quantitative easing.
The latest discouraging data from the labour market, including net job losses in December and a surprise surge in first-time jobless claims last week, have also pointed to huge slack remaining in the labour market.
“Right now the economy is stalled. I don’t know how long that’s going to persist, but we’re still quite far away from where we need to be to get into full employment,” Eric Rosengren, the president of the Boston Fed, told the Financial Times this week. “As long as that’s true, we need to continue to do an asset purchase programme that will continue to provide accommodation,” he said.
Treasuries nonetheless sold off as Mr Powell spoke on Thursday. Benchmark 10-year Treasury yields, which rise as prices fall, climbed 0.05 percentage points to 1.13 per cent.
Mr Powell’s dovish stance was reinforced by comments on inflation, in which he suggested the Fed would not overreact to a sudden but temporary jump in consumer prices this year as the economy rebounds from the pandemic.
“The real question is, how large is that effect going to be and will it be persistent? Because clearly a one-time increase in prices that isn’t very large is very unlikely to mean persistently high inflation,” he said, pointing to both the trouble in the labour market and the global low interest rate environment.
“When the time comes to raise interest rates, you know, we’ll certainly do that,” he said. “And that time, by the way, is no time soon.”