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It’s working! Economic recovery on the horizon as Fed dials back pandemic-era adjustments

Aug 27, 2021


Federal Reserve Chair Jerome Powell said the Fed will begin to dial back some of the pandemic-era adjustments made to keep the economy going during the height of COVID. His announcement came during his keynote speech at an annual gathering of central bankers and academics.

The Fed will taper off its $120 billion a month bond-buying program designed to hold down longer-term rates and spur borrowing and spending. Powell’s comments indicate it will happen sometime in the fourth quarter of 2021.

Even with this move, interest rate hikes are likely a good deal off in the future.

On Wall Street, investors appeared to welcome the tapering of the Fed’s economic support. The Dow Jones Industrial Average rose 225 points soon after Powell spoke.

Also encouraging for investors, Powell said Friday surging inflation pressures will likely prove temporary.

According to the Fed’s preferred gauge, inflation rose 3.6 percent  in July compared to a year earlier. That’s the biggest increase in three decades. The month-to-month increase slowed from 0.5 percent to 0.3 percent.

The recent jump in inflation has put the Fed’s policies under growing scrutiny, both in Congress and among ordinary households.

In his speech, Powell underscored his longstanding belief that the price surge should slow down once the economy further normalizes and supply shortages die down. He said history suggests the Fed should not overreact to temporary price spikes by undoing its support for the economy too aggressively.

According to Powell, inflation has risen enough to meet its test of “substantial further progress” toward the Fed’s goal of 2% annual inflation over time, which was necessary to begin tapering.

He also said the central bank is monitoring any possible economic impact of the highly contagious delta variant. The ongoing rise in cases could slow spending in such areas as air travel, restaurant meals and entertainment.

“While the delta variant presents a near-term risk, the prospects are good for continued progress toward maximum employment,” Powell said.