“Before the pandemic, we all saw the extraordinary benefits that a strong labor market can deliver to our society,” Powell said in remarks delivered Friday morning at a conference hosted by the Kansas City Fed. “Despite today’s challenges, the economy is on a path to just such a labor market, with high levels of employment and participation, broadly shared wage gains and inflation running close to our price stability goal.”
Powell’s speech comes at a highly consequential time for the overall economy — and for Powell himself. The delta variant of the coronavirus has led to a recent drop in consumer sentiment, according to a closely watched survey from the University of Michigan. Meanwhile, the pandemic is straining global supply chains, contributing to inflation and making it more expensive for people to rent houses and buy cars and groceries. Americans most vulnerable to the price hikes, including people still out of work, will soon lose their expanded unemployment benefits and could face eviction.
Meanwhile, Powell’s term as chair expires in February, and the White House must decide whether to reappoint him. Powell has garnered praise across Washington for his leadership during the coronavirus recession. But only time will tell whether his outlook — on inflation and the labor market — will prove to be right.
In March 2020, coronavirus cases began to spread throughout the United States, shutting down the economy and causing the financial markets to tank, while millions of workers were laid off or furloughed. The Fed swooped in to prop up the markets with several programs.
Fed leaders have consistently said they need to see “substantial further progress” on inflation and job growth before the central bank starts to pare back its $120 billion a month in asset purchases, which have been helping support the markets. For months, economists and Wall Street have been eager for any signs about when or how the Fed will begin to “taper” its bond-buying program, which helps stimulate the economy and makes borrowing easier by holding down long-term rates.
“My view is that the ‘substantial further progress’ test has been met for inflation,” Powell said in the remarks. “There has also been clear progress toward maximum employment.”
Powell added that at the Fed’s last policy meeting in July, he “was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year.”
Powell noted that while July brought a strong jobs report, it also marked the spread of the delta variant. After the Fed’s July meeting, Powell said the delta variant could have fewer implications for the economy if it follows the pattern of past waves of coronavirus surges.
On Friday, he said that “while the delta variant presents a near-term risk, the prospects are good for continued progress toward maximum employment.”
Powell did not lay out a clear timeline for when the Fed could change its policies or how the Fed could structure its taper. The monthly asset purchases are made up of $80 billion in Treasury securities and $40 billion in mortgage-backed securities. Surging home prices have some economists arguing that the Fed should reduce its purchases of mortgage-backed securities more quickly.
Powell’s remarks came at a crucial time for Fed policymaking and for the economy overall. Prices are rising, workers are in short supply, and the economy remains about 5.7 million jobs down from where it was before the pandemic was declared in March 2020. Supports for the most vulnerable are about to disappear, with the Supreme Court striking down the eviction moratorium late Thursday and added federal unemployment benefits expiring in less than two weeks.
Economic leaders at the Fed and in the Biden administration emphasize that there is no playbook for this economy and that controlling the pandemic is key to the economy’s sustained recovery. In a bit of symbolism, Powell’s speech was supposed to headline the Kansas City Fed’s annual Jackson Hole conference in Wyoming. But just last week, the program was made entirely virtual amid coronavirus concerns.
At last year’s virtual symposium, Powell unveiled a new framework that said the Fed would not respond to low unemployment levels by raising rates, thereby slowing the economy. That kind of policy has been tested in the past few months as inflation has soared faster than Fed policymakers expected.
But on Friday, Powell reiterated one of the reasons the Fed has not rushed to tamp down on inflation, which Fed leaders say is a temporary feature of the pandemic economy — wariness of any policies that could slow hiring and undercut peoples’ ability to get back into the labor market.
“Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful,” Powell said. “We know that extended periods of unemployment can mean lasting harm to workers and to the productive capacity of the economy.”
Head winds are beginning to show. On Friday, the Bureau of Economic Analysis reported that while consumer spending remained historically high in July, it increased just 0.3 percent compared with June. All of the increase was due to higher prices; adjusted for inflation, spending actually fell slightly, down 0.1 percent.
Powell routinely says there will be plenty of warning before any action is announced, and he was not expected to reveal a detailed course of action during his Friday speech. Fed policymakers will resume their taper talks at their next meeting in September.
This week, a handful of Fed leaders offered takes aligned with the message of Powell’s speech.
“People’s views, my views, have evolved over time as the data comes in,” Philadelphia Fed President Patrick Harker told Yahoo Finance on Friday. “So now I think we’re reaching consensus that tapering should happen sometime this year as the chair said.”
Even with a growing consensus, some Fed leaders say the economy is already healthy enough for the Fed to start pulling back its support.
“We want to get going on taper, get the taper finished by the end of the first quarter next year,” St. Louis Fed President James Bullard said Thursday. on CNBC.
Meanwhile, another group of policymakers wants to see more data before slowing down asset purchases. Fed governor Lael Brainard, for example, indicated in July that she would want to make a decision after seeing September hiring data, which will no be released until early October.
Ultimately, the Fed’s decisions will hinge on the pandemic and the coronavirus’s ability to undercut the labor market or push prices even higher. The U.S. economy boomed by 943,000 jobs in July, but it is unclear whether the spread of the delta variant will hold back hiring in August.
Meanwhile, inflation continues to test policymakers at the Fed and in the Biden administration. Supply-chain backlogs — on items as varied as semiconductors and sofas — have collided with a rebound in consumer demand, pushing prices higher at a faster clip than expected.
“A lot of people don’t realize what goes into a couch or what goes into a house, but they know their couch has been delayed three months or six months,” Dallas Fed President Robert Kaplan told The Washington Post on Thursday.
On Friday, data released by the Bureau of Economic Analysis showed prices rose 4.2 percent in July compared with a year ago and 0.4 percent compared with June. Those figures were in line with analysts’ expectations and came as economists wait for enough weeks or months of data to assess whether the pace of inflation is starting to ease up.
The Fed’s expectation is that as supply chains clear up, prices will not keep rising as quickly. The most recent projections released by the Fed suggest inflation could simmer back down toward the Fed’s 2 percent annual inflation target next year.
Andrew Van Dam contributed to this report.