Federal Reserve Chair, Jerome Powell, expressed concerns over persistently high inflation. He emphasized that the central bank would begin tapering its bond purchases shortly while remaining patient on raising interest rates.
During a virtual panel discussion hosted by the South African Reserve Bank on Friday, he said the risks are now more prolonged and more persistent bottlenecks leading to higher inflation.
At their November policy meeting, the Federal Open Market Committee (FOMC) would announce that they will begin winding down the bond-buying program put in place last year in the early days of the pandemic.
Currently, the Fed is acquiring $120 billion of Treasuries and mortgage-backed securities each month.
The future reduction in the pace of purchases will mark the central bank’s first step toward the exit from the monetary support measures rolled out in 2020 to shield the economy from the effects of the coronavirus.
The Fed chair spoke on the final day before monetary policymakers entered a media blackout period ahead of the FOMC’s upcoming meeting.
Fed-watchers homed in on his characterization of growing inflation risks at the end of a week when measures of inflation compensation in financial markets rose to multi-decade highs.
Powell sounded less anxious about employment but more anxious about inflation. Investors increasingly expect Fed officials to begin raising their benchmark interest rate, which is currently just above zero, the middle of next year.
The timeline for expected rate hikes has been pulled forward in money markets amid higher inflation in recent weeks.
This is running well above the central bank’s 2% target amid global supply-chain disruptions that boost prices for a wide range of goods and services.
The Fed chair said the risk is that the current elevated inflation rates will begin to lead price- and wage-setters to expect unduly high rates of inflation in the future, which could ultimately force the Fed to respond.
However, he added that it is still the most likely case that inflation would subside as supply-chain constraints ease.
Gold Gains Post Powell Speech
After his speech, gold advanced for a fifth day as risks around higher-for-longer inflation bolstered the case for buying the metal.
Meanwhile, Treasury Secretary, Janet Yellen, said she expects price hikes to remain high through the first half of 2022 and ease in the second half but rejects criticisms that the US risks losing control of inflation.
Bullion has rallied this month as traders attempt to gauge how central banks will address the rising price pressures, which supply-chain bottlenecks and higher energy costs have stoked.
There are also growing risks to the outlook for China, where the Delta virus outbreak could worsen in the coming days, and the economy faces headwinds from a property-sector slowdown.