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Fed Chair Powell Says Taper Tests Have Been Met, Remains Vague on Timing

"The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff," Powell said.

Federal Reserve Chairman Jerome Powell said Friday that enough progress has been made on jobs and inflation to begin slowing the pace of the central bank's $120 billion in monthly bond purchases. 

However, he also repeated the Fed's insistence that the so-called tapering of bond purchases should not be seen as a "direct signal" to a pending increase in interest rates.

In a virtual keynote address to the Kansas City Fed's annual central bank symposium, normally held in Jackson Hole, Wyoming, Powell said the "substantial further progress" test on inflation has been met, adding there has been 'clear progress' on a return to maximum employment. 

"There has also been clear progress toward maximum employment," Powell said. "At the FOMC's recent July meeting, I 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."

"The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the Delta variant," he added. "We will be carefully assessing incoming data and the evolving risks. Even after our asset purchases end, our elevated holdings of longer-term securities will continue to support accommodative financial conditions."

U.S. stocks were modestly higher following the release of Powell's text, with the Dow Jones Industrial Average gaining 210 points and the broader S&P 500 marked 29 points higher. The tech-focused Nasdaq Composite, meanwhile, gained 110 points.

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Benchmark 10-year Treasury note yields eased to 1.327%  while the U.S. dollar index, which tracks the greenback against a basket of six global currencies, was marked 0.25% lower at 92.793.

A chorus of Fed Presidents have advanced the case for a near-term tapering of the central bank's $120 billion in monthly bond purchases, noting elevated levels of inflation, accelerating employment gains and broad-based post-pandemic recovery.

Others, including Powell, have argued that inflation pressures are likely to ease early next year as supply-chain disruptions fade and the base-effects from last year's pandemic trough falls out of CPI and PCE index measurements.

The spike in inflation is so far largely the product of a relatively narrow group of goods and services that have been directly affected by the pandemic and the reopening of the economy," Powell said. "Market participants also believe that current high inflation readings are likely to prove transitory and that, in any case, the Fed will keep inflation close to our 2% objective over time."

Rising COVID infections, record levels of unfilled job postings and recent pullbacks in housing, retail sales and consumer sentiment have raised concerns over the pace of economic growth heading into the final months of the year.

The unevenness of the recovery can further be seen through the lens of the sectoral shift of spending into goods—particularly durable goods such as appliances, furniture, and cars—and away from services, particularly in-person services in areas such as travel and leisure," Powell said. 

"Given the ongoing upheaval in the economy, some strains and surprises are inevitable," he added. "The job of monetary policy is to promote maximum employment and price stability as the economy works through this challenging period. I will turn now to a discussion of progress toward those goals."