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Stocks End at Records as Fed's Powell Decouples Tapering From Rate Hikes

Federal Reserve Chairman Jerome Powell says the central bank could begin pulling back on stimulus this year but signals that won't lead directly to rate hikes.

The Nasdaq and S&P 500 closed at record highs Friday after Federal Reserve Chairman Jerome Powell said the central bank gradually could begin pulling back on stimulus this year since the economy has met the Fed's criteria on progress in inflation and employment.

The Dow Jones Industrial Average closed up 241 points, or 0.69%, to 35,454, the S&P 500 gained 0.88% and the Nasdaq jumped 1.23%.

For the week, the Dow rose 0.96%, the S&P 500 added 1.52% and the Nasdaq gained 2.82%.

The Fed has been buying about $120 billion a month of Treasury securities and mortgage bonds to help prop up the economy during the pandemic.

During the speech Friday, the Fed chief said the central bank wasn't in a hurry to boost near-zero interest rates.

At the Fed’s last meeting in late July, “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,” Powell said at the virtual Jackson Hole symposium on Friday.

“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.”

Powell said that the Fed's "substantial further progress" test on inflation had been met, adding "clear progress" had been made on a return to maximum employment. 

The Fed though wasn't ready to begin raising interest rates anytime soon.

“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, for which we have articulated a different and substantially more stringent test,” the Fed chief said.

"It’s worth noting that Chairman Powell warned market participants that bond tapering should be differentiated from rate lift-off as one event may not seamlessly lead to the other," said Charlie Ripley, senior investment Strategist for Allianz Investment Management. 

"Ultimately, the Fed is attempting to wean the economy off the unprecedented amounts of monetary stimulus without upsetting markets and the over-transparent process is their attempt to do so," Ripley added.

Treasury yields fell after the Fed's preferred measure of U.S. inflation accelerated again in July, rising at the fastest pace in three decades. Personal incomes in the U.S. rose by a stronger-than-expected 1.1% and consumer spending rose 0.3%, matching estimates.

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Powell joins a chorus of other Fed officials who said the economy has reached the point where the central bank can begin pulling back on economic stimulus. Kansas City Fed President Esther George told CNBC it was "appropriate given the progress we’ve seen."

Dallas Fed President Robert Kaplan said he would be pushing for the Fed to announce a pullback in stimulus in September with tapering to begin in either October or November.

Raphael Bostic, president of the Atlanta Fed, said Friday he would be “comfortable with an October timeline for starting" bond tapering if employment gains remain strong. 

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