What the Fed Said

Scaling Back Low-Rate Policies

On Friday, Federal Reserve Chairman Jerome Powell spoke about the central bank’s monetary policy plans in the upcoming months. This was part of the Fed’s annual Jackson Hole conference, which was held virtually. The Fed has implemented a historic response to pandemic-related economic downturn. Now, the bank is making plans to scale back these measures and help the economy regain normalcy.

Powell said that the Federal Reserve will begin reining in its low-rate policies later this year if the labor market continues to strengthen. This will likely translate to higher borrowing costs for business loans, mortgages, and credit cards. During the pandemic, the central bank has been purchasing $120 billion per month in mortgage and Treasury bonds in order to keep loan rates low and encourage borrowing and spending. Powell said that the Fed will begin tapering these purchases sometime in the fourth quarter of the year.

Getting the Economy Back on Track

Powell emphasized that the Fed’s decision to taper its bond buying does not mean it will start raising its benchmark short-term rate, which has been near zero since the pandemic began hammering the economy in March 2020. It is expected that rate hikes will not occur until the central bank has finished tapering its bond buying.

Powell said that inflation has climbed enough to meet the bank’s goals. Additionally, employment levels are getting back on track. Powell noted that the Fed’s leadership is monitoring the impact of the Delta variant of COVID-19 on the economy, but it believes that in the long term, economic conditions are headed in the right direction.

Wall Street’s Response

On Wall Street, many investors were bullish regarding the Federal Reserve’s plans to gradually reduce economic support. They also cheered Powell’s comments saying that inflation pressures are likely to be temporary.

In July, inflation increased 3.6% compared to a year ago, according to the Federal Reserve’s preferred gauge. This marked the most significant jump seen in three decades. Higher prices have squeezed American households and have created challenges for businesses across industries. As the Fed makes moves to normalize the economy, it is likely that inflation will begin to abate.

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