"Still Far Off" Powell's Dove 'Tenacity'... Employment Recovery as Tapering Condition (Comprehensive Report 2)

Fed Statement "Economic Progress Seen"
"Will Assess at Upcoming Meetings"... Tapering Discussion Begins
Chairman Powell Still Drawing the Line
"Must Confirm Employment Recovery"
"No Priority Reduction in MBS Purchases"

[Image source=Reuters Yonhap News]

[Asia Economy New York=Correspondent Baek Jong-min] Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), once again revealed his dovish stance. Despite the Fed's statement evaluating that the economy has made considerable progress, Powell emphasized once again that there is still a long way to go toward normalizing monetary policy. However, as the Fed has begun discussions on tapering asset purchases, the prevailing view is that it will eventually implement the measure.

On the 28th (local time), at a press conference following the Federal Open Market Committee (FOMC) regular meeting, Powell was asked about the normalization of monetary policy. He said, "Significant economic improvement is necessary before we begin to withdraw accommodative monetary policy." He repeatedly emphasized the need to confirm substantial progress in employment.

The Fed's statement released that day decided to maintain near-zero interest rates and continue asset purchases but emphasized that the U.S. economy will continue to strengthen despite the spread of the Delta COVID-19 variant.

The Fed stated in the statement, "In December last year, the Committee announced it would continue purchasing assets until substantial further progress has been made toward maximum employment and price stability goals," adding, "Since then, the economy has made progress toward these goals."

The Fed also mentioned, "Assessments of progress will be made at upcoming meetings." U.S. media outlets such as The New York Times immediately interpreted this as indicating that the Fed has begun discussions on tapering asset purchases.

Gus Faucher, Chief Economist at PNC, judged, "The tapering clock has started to move."

However, the statement did not specify a concrete timing for tapering but expressed a stance of continuing to monitor the situation.

Compared to the somewhat positive statement on tapering, Powell's position remained consistent this time as well. He said, "There is still a considerable distance to achieve the Fed's goals of stable prices and maximum employment."

Powell also added that the Fed has not made any decisions regarding the tapering schedule.

Powell judged that despite the spread of the Delta variant, there is no significant economic risk impact. He said, "The ripple effects caused by successive COVID-19 outbreaks have eased in recent months," and added that they will observe whether this applies to the Delta variant as well.

Powell also said, "We have learned to live with COVID-19."

Powell noted that the spread of the Delta variant could pose a burden on workers returning to their workplaces and said, "We will monitor this carefully." This was also interpreted to mean that if employment recovery becomes visible despite the Delta variant, the Fed could decide to taper.

However, Powell emphasized regarding some Fed members' concerns about rising real estate prices and their argument that monthly purchases of $40 billion in mortgage-backed securities (MBS) should be reduced first, "We are not considering reducing MBS purchases before Treasury purchases."

Regarding inflation, Powell expected that it has "increased noticeably and will continue to rise over the next few months," but forecasted that it will eventually decline toward the long-term target as supply chain bottlenecks ease.

Meanwhile, the Chicago Mercantile Exchange's Fed Watch raised the probability of a rate hike in 2022 from 54.4% before the meeting to 62%. The New York Times assessed that even if the Fed starts tapering, interest rates are likely to remain low.

On the day, the U.S. 10-year Treasury yield recorded 1.238%, showing little change from the previous day. On the New York Stock Exchange, the S&P 500 index slightly declined after the Fed statement but turned to an upward trend following Powell's remarks and closed near the flat line.