Powell says U.S. Fed could start tapering asset purchases this year amid Delta variant risks

WASHINGTON, Aug. 27 (Xinhua) -- U.S. Federal Reserve Chair Jerome Powell said on Friday that the Fed could start tapering asset purchases this year as the central bank is carefully assessing the risks from the Delta variant.

"My view is that the 'substantial further progress' test has been met for inflation. There has also been clear progress toward maximum employment," Powell said in a speech during the Federal Reserve Bank of Kansas City's annual Jackson Hole economic symposium.

The Fed has pledged to keep its benchmark interest rate unchanged at the record-low level of near zero, while continuing its asset purchase program at least at the current pace of 120 billion U.S. dollars per month until "substantial further progress" has been made on employment and inflation.

The minutes of the Fed's July meeting showed that most Fed officials indicated it was appropriate for the central bank to start tapering asset purchases this year, but no decisions regarding asset purchases were made at the 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," Powell said.

"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. We will be carefully assessing incoming data and the evolving risks," he added.

The Fed chief also cautioned that a move to start tapering asset purchases should not be interpreted as a sign that rate hikes would soon follow.

"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," Powell said, adding "we have much ground to cover" to reach maximum employment.

"This speech ... implies that the Fed most likely expects the recent gains in the labor market to continue and put the central bank on track to announce the tapering of asset purchases in November with a likely start of operations in December," Joseph Brusuelas, chief economist at accounting and consulting firm RSM US LLP, said Friday.

"The dovish statement on the Fed's asset purchase policy and the optimistic outlook on hiring combined to send equity prices higher and bond yields lower in the immediate aftermath of the speech, which was well received by market actors and investors," Brusuelas said in a blog.

Gregory Daco, chief U.S. economist at Oxford Economics, agreed that Powell's speech anchored expectations that the Fed would announce tapering in November with a reduction in asset purchases starting in December or January, depending on the spread of the Delta variant and its impact on employment.

"Maintaining the Fed's data dependent approach, Powell stressed the importance of further progress on the employment front," Daco said in a note, adding Powell sounded optimistic that increased vaccinations, reopening schools, and expiring unemployment insurance benefits would help alleviate labor supply constraint and boost employment.

Roberto Perli, a former Fed staffer and now head of global policy research at Cornerstone Macro, noted that the Fed has said it would provide "advance notice" before announcing any decision regarding asset purchases, and so far it hasn't done so.

"Earliest it can provide it is September, which leaves November as earliest tapering start," Perli said on Twitter, adding the Fed has three policy meetings left in 2021, scheduled in September, November and December.

"Delta variant and unforeseen slowdown in the labor market could delay things. But considering the additional labor market progress since the July meeting, the hurdle for delay is high," he said.