Eighteen months into the pandemic, Jerome H. Powell, the Federal Reserve chair, has offered the strongest sign yet that the Fed is prepared to soon withdraw one leg of the support it has been providing to the economy as conditions strengthen.
At the same time, Mr. Powell made clear on Friday that interest rate increases remained far away, and that the central bank was monitoring risks posed by the Delta variant of the coronavirus.
The Fed has been trying to bolster economic activity by buying $120 billion in government-backed bonds each month and by leaving its policy interest rate at rock bottom. Officials have been debating when to begin slowing their bond buying, the first step in moving toward a more normal policy setting. They have said they would like to make “substantial further progress” toward stable inflation and full employment before doing so.
Mr. Powell, speaking at a closely watched conference that the Kansas City Fed holds each year, used his remarks to explain that he thinks the Fed has met that test when it comes to inflation and is making “clear progress toward maximum employment.”
six million fewer jobs than before the pandemic. And the Delta variant could cause consumers and businesses to pull back as it foils return-to-office plans and threatens to shut down schools and child care centers. That could lead to a slower jobs rebound.
Mr. Powell made clear that the Fed wants to avoid overreacting to a recent burst in inflation that it believes will most likely prove temporary, because doing so could leave workers on the sidelines and weaken growth prematurely. While the Fed could start to remove one piece of its support, he emphasized that slowing bond purchases did not indicate that the Fed was prepared to raise rates.
“We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis,” he said in his address to the conference, which was held online instead of its usual venue — Jackson Hole in Wyoming — because of the latest coronavirus wave.
The distinction he drew — between bond buying, which keeps financial markets chugging along, and rates, which are the Fed’s more traditional and arguably more powerful tool to keep money cheap and demand strong — sent an important signal that the Fed is going to be careful to let the economy heal more fully before really putting away its monetary tools, economists said.
told CNBC on Friday that he supported winding down the purchases “as quickly as possible.”
“Let’s start the taper, and let’s do it quickly,” he said. “Let’s not have this linger.”
James Bullard, the president of the Federal Reserve Bank of St. Louis, said on Friday that the central bank should finish tapering by the end of the first quarter next year. If inflation starts to moderate then, the country will be in “great shape,” Mr. Bullard told Fox Business.
“If it doesn’t moderate, then I think the Fed is going to have to be more aggressive in 2022,” he said.