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Fed Chair Powell: 'Be careful not to exit too early' on easy monetary policy

Federal Reserve Chairman Jerome Powell said Thursday that central bank policymakers should be mindful of how they talk about any future pullback in easy monetary policy.

“Be careful not to exit too early,” Powell said in a webinar at Princeton University. “And by the way, try not to talk about exit if you’re sending that signal, because markets are listening.”

Powell’s remarks come as chatter builds over the central bank’s plans for its massive asset purchase program.

Atlanta Fed President Raphael Bostic said in recent weeks that he is “hopeful that in fairly short order we can start to recalibrate” so-called quantitative easing, suggesting that the central bank could begin tapering its purchases — as soon as this year.

Bostic is a voting member of this year’s policy-setting Federal Open Market Committee.

But Powell’s commentary may be an attempt to quell any jitteriness over the Fed pulling back on its accommodative policy. Fed Vice Chairman Richard Clarida said Wednesday that he expects the Fed to keep up its pace of asset purchases through 2021.

The Fed’s latest guidance, from its December policy-setting meeting, committed to buying at least $120 billion a month in U.S. Treasuries and agency mortgage-backed securities until “substantial further progress” is made on the recovery.

Time to hike rates?

Powell said he currently sees the economy as “far from our goals,” adding that when “clear evidence” points to progress, Fed policymakers will spell out its plans to financial markets.

“We’ll let the world know,” Powell said. “We will communicate very clearly to the public and we’ll do so, by the way, well in advance of active consideration of beginning a gradual tapering of asset purchases.”

Federal Reserve Chair Jerome Powell speaks with Markus Brunnermeier at a Princeton Bendheim Center for Finance event on Thursday, January 14, 2021.
Federal Reserve Chair Jerome Powell speaks with Markus Brunnermeier at a Princeton Bendheim Center for Finance event on Thursday, January 14, 2021.

Powell said the Fed is also far from moving on near-zero interest rates, which Fed speakers clarified would happen after a tapering of its quantitative easing program.

“When the time comes to raise interest rates, we will certainly do that. And that time, by the way, is no time soon,” Powell said.

The Fed chair said he is optimistic for an economic recovery, adding that a post-pandemic economy could even see some “exuberant spending” that pushes inflation higher.

But Powell appeared to brush off concerns that inflation would be “persistent,” pointing to global disinflationary trends that have made it difficult for central banks to reach their 2% inflation targets.

Still, the Fed chair said policymakers have the ability to combat runaway inflation if that occurs.

“If inflation were to move up in ways that are unwelcome we have the tools for that, and we’ll use them. No one should doubt that,” Powell said.

The central bank’s next policy-setting announcement is scheduled for Jan. 27.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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