In his opening remarks for the annual Jackson Hole Economic Symposium, Federal Reserve Chair Jerome Powell signaled that the central bank could begin tapering its $120 billion in monthly asset purchases this year, but that he was not considering interest rate hikes 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," Powell said.
Monthly asset purchases and near-zero interest rates have been the Fed's main tools in propping up the economy since the beginning of the COVID-19 pandemic in 2020.
When exactly the Fed will wind down these accommodative measures has been a topic of fierce debate among both Fed officials and market participants, who have been eager for clarity on the central bank's next move as inflation has come in higher than expected in recent months.
Minutes from the latest meeting of the Federal Open Market Committee showed that a majority of Fed officials agreed tapering should begin this year, but today's comments were a much-anticipated confirmation.
Powell noted that the economy had met the criteria of "substantial further progress" on the goal of hitting an average inflation rate of around 2 percent, which is the framework Powell put in place at last year's symposium and showed no signs of abandoning this year.
As for maximum employment, the Fed's other mandate, he said the economy had seen clear progress but that there was still "much ground to cover."
"The unemployment rate has declined to 5.4 percent, a post-pandemic low, but is still much too high, and the reported rate understates the amount of labor market slack," he said. "Long-term unemployment remains elevated, and the recovery in labor force participation has lagged well behind the rest of the labor market, as it has in past recoveries."
He predicted that some of the labor market slack would fade in the coming months, as a number of factors pushed people back into the job market.
"With vaccinations rising, schools reopening, and enhanced unemployment benefits ending, some factors that may be holding back job seekers are likely fading," he said.
In addition, Powell stressed that the economic recovery so far had been uneven, with service workers and Hispanic and African Americans still bearing the brunt of the downturn.
He attributed this disparity in part to the shift in consumer spending from services to durable goods, a trend that continues even as spending steadily shifts back to the service sector.
Overall, Powell said it's important for the Fed not to respond too hastily to increases in inflation, which he maintains are transitory.
"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," he said.
If inflation does end up persisting, he said the central bank will respond accordingly.
"If sustained higher inflation were to become a serious concern, the [Federal Open Market Committee] would certainly respond and use our tools to assure that inflation runs at levels that are consistent with our goal," he said.
Compared to last year's big announcement of "average inflation targeting," which marked a major shift in policy for the Fed, this year's Jackson Hole remarks were relatively unsurprising, with the prospect of tapering before the end of the year circulating for weeks now.