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Central Bank Will Begin Reducing Bond Purchases 'Well Before' Raising Interest Rates, Powell Says -- Update

04/14/2021 | 01:04pm EDT

By Paul Kiernan

WASHINGTON -- Federal Reserve Chairman Jerome Powell said Wednesday that the central bank will begin to slow the pace of its bond purchases "well before" raising interest rates.

The Fed has been buying at least $120 billion a month of Treasury debt and mortgage-backed securities since last June to hold down long-term borrowing costs. Since December, the central bank has said the economy must make "substantial further progress" toward its goals of maximum employment and 2% inflation before it scales back those purchases.

"We will taper asset purchases when we've made substantial further progress toward our goals, from last December when we announced that guidance," Mr. Powell said in a virtual event held by the Economic Club of Washington, D.C. "That would in all likelihood be before--well before--the time we consider raising interest rates."

The Fed has said it will hold rates near zero until it sees the labor market return to full employment and inflation rise to 2% and is forecast to moderately exceed that level for some time. Mr. Powell reiterated that he thinks it is highly unlikely that the Fed would raise interest rates this year and noted that most central-bank officials see rates remaining near zero through 2023.

Mr. Powell's comments came a day after the Labor Department reported the biggest one-month jump in the consumer-price index since 2012. While the Fed targets a different measure of inflation--the personal-consumption-expenditures price index--the CPI provides much of that index's raw data.

Tuesday's report fueled concerns that inflation, dormant through the record-long economic expansion from 2009 to 2020, could soon become a challenge for policy makers. Mr. Powell acknowledged those worries while reiterating that the Fed seeks inflation "that is moderately above 2% for some time" to make up for the past decade's shortfalls.

"For quite some time, many people were saying, 'Well, you'll never get above 2%,' because it [has] been very hard to get back to 2%," Mr. Powell said. "Now more of the discussion is on the other side."

Both the Biden administration and the Fed acknowledge the possibility of prices rising faster than usual in coming months as the economic recovery strengthens and demand for goods and services temporarily outruns supply. But both expect the acceleration in inflation to prove temporary.

"In most cases, this type of inflation is transitory: the price of lumber or energy rises, but then stabilizes at a higher level or decreases, with no further impact on future inflation," the White House Council of Economic Advisers said in a blog post about inflation on Monday, a day before the Labor Department's report. "This example underscores an important distinction between price levels and inflation, with the latter being the rate at which levels move up and down."

Mr. Powell in the past has emphasized that the type of inflation that preoccupies the Fed is a process rather than the outcome of an idiosyncratic event such as the economy rebounding after a pandemic.

Write to Paul Kiernan at paul.kiernan@wsj.com

(END) Dow Jones Newswires

04-14-21 1504ET

Stocks mentioned in the article
ChangeLast1st jan.
AUSTRALIAN DOLLAR / US DOLLAR (AUD/USD) 0.10% 0.72983 Delayed Quote.-4.58%
BRITISH POUND / US DOLLAR (GBP/USD) 0.03% 1.3801 Delayed Quote.1.27%
CANADIAN DOLLAR / US DOLLAR (CAD/USD) 0.11% 0.7892 Delayed Quote.0.91%
DJ INDUSTRIAL -0.18% 34751.32 Delayed Quote.12.97%
EURO / US DOLLAR (EUR/USD) 0.05% 1.17709 Delayed Quote.-3.23%
INDIAN RUPEE / US DOLLAR (INR/USD) 0.07% 0.013605 Delayed Quote.-0.58%
NEW ZEALAND DOLLAR / US DOLLAR (NZD/USD) 0.04% 0.70726 Delayed Quote.-0.67%
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