Jerome Powell: The Fed may wind down its stimulus sooner than expected

The Federal Reserve might end its pandemic-era stimulus sooner than expected, Chairman Jerome Powell told the Senate Banking Committee on Tuesday.

The central bank announced a tapering of its monthly asset purchases at its monetary policy update earlier this month, cutting bond buying by $10 billion for Treasury securities and $5 billion for agency mortgage-backed securities.

But this pace might no longer be appropriate, Powell suggested.

“At this point the economy is very strong and inflationary pressures are high and it is therefore appropriate in my view to consider wrapping up the taper of our asset purchases … perhaps a few months sooner,” Powell said.

“We’re going to a have a discussion about accelerating that taper,” at the upcoming December meeting, he added. The central bank will give and update on its policies on December 15.

Until then, economists — at the Fed and elsewhere — will get another look at the US labor market, with the November jobs report due on Friday. And the public might know more about the new Omicron variant of the coronavirus by then as well.

It’s about learning about the transmissibility, the ability of existing vaccines working against it and about the severity of the illness if contracted, Powell said.

“Then and only then we can make an assessment on the effect on the economy,” he added.

Either way, the stock market didn’t like hearing that, and the major US indexes extended their losses on the back of Powell’s comments. The yield on the 10-year Treasury bond, meanwhile, bounced off its lows as interest rate expectations changed.

Let’s stop saying ‘transitory’

The high recovery-era prices means that the Fed’s test for inflation has been met, and that’s why the central bank is considering to speed up its tapering timeline.

“Generally speaking the higher prices we’re seeing can be traced back to the pandemic,” Powell said. But the increases are now broader, and the upward pressure on inflation is no longer isolated, he added.

But speaking of inflation, Powell made another big statement: Let’s stop using the word “transitory”, one of the pandemic buzzwords to describe inflation.

The Federal Reserve uses “transitory” to describe the Covid-era jump in prices, which the central bank believes to be temporary. Although temporary sounds like it should be short-term, prices have been on the rise for a while now.

The traditional meaning of “transitory” is not what the Fed thinks it means at all. According to the central bank, transitory means it won’t leave any marks on the economy once the trends reverse again… whenever that may be.

“Everything is transitory. Life is transitory,” said Pennsylvania Senator Pat Toomey during Tuesday’s hearing.

“It’s probably a good time to retire that word and explain what we mean,” Fed Chairman Jerome Powell said in response.

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