Fed Chief Signals US May Be Ready For Less Stimulus

The US economy and labour market have healed to the point that the central bank could begin to withdraw its stimulus measures by the end of the year, Federal Reserve Chair Jerome Powell said on Friday.

But the Fed chief stressed that there was no hurry to raise interest rates, arguing that current inflation pressures will be temporary.

When Covid-19 hit the world's largest economy last year, the Fed jumped into action to prevent a major recession, slashing interest rates to zero and buying huge amounts of Treasury debt and agency mortgage-backed securities to provide liquidity to the financial system.

The pandemic recession was "the briefest yet deepest on record," Powell said in his highly anticipated speech to the annual Jackson Hole central banking symposium. With millions of jobs recovered, he signaled that the Fed may ease the pace of bond buying from its current US$120 billion per-month.

Powell provided no specifics, but instead repeated the Fed's stance that "it could be appropriate to start reducing the pace of asset purchases this year".

Any move to slow asset purchases would still leave a large amount of stimulus in place, and would not be a signal that an increase in the benchmark lending rate would soon follow, he said.

Widespread vaccinations have allowed businesses across the United States to reopen fully, bringing the unemployment rate down to 5.4 percent last month, much closer to the pre-pandemic level of 3.5 percent.

However Powell said there is more work to do and the fast-spreading Delta variant of Covid-19 adds uncertainty.

Prices have jumped as the economy restarted, pushing inflation up to 4.2 percent annually in July, well above the Fed's long-term target of two percent, according to the central bank's preferred price index.

However, he downplayed fears inflation could accelerate, noting that supply bottlenecks appear to be resolving and wage increases do not appear to be spilling over into prices.

While he was upbeat about the outlook, Powell noted that total employment remains about six million below its February 2020 level "and five million of that shortfall is in the still-depressed service sector".

"While the Delta variant presents a near-term risk, the prospects are good for continued progress toward maximum employment," he said. (AFP)