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Fed Chairman Jerome Powell: Taper likely to be done by 'middle of next year'

Federal Reserve Chairman Jerome Powell on Wednesday teed up the start of a pullback in the central bank’s extraordinary crisis-era monetary stimulus, saying that it could wrap up its asset purchase program before the end of 2022.

“Participants generally viewed that so long as the economic recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate,” Powell told reporters on Wednesday.

Earlier in the afternoon, the policy-setting Federal Open Market Committee said the U.S. economy recovery was progressing well enough to allow the Fed to soon slow its purchases of U.S. Treasuries and agency mortgage-backed securities (which it's buying at an aggregate pace of about $120 billion per month).

“If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted,” the FOMC statement reads.

The Fed’s tilt toward a taper announcement suggests that the central bank could be ready as soon as its next meeting in early November to actually announce something.

The central bank has said it would not start tapering until the economy looked like it had made “substantial further progress” towards the Fed’s dual mandate goals of maximum employment and stable prices.

Powell said inflation well above the Fed’s 2% target has achieved that progress, but said the labor market recovery had not. An August jobs report showed 235,000 job gains, well short of the over 700,000 payroll gains estimated by Wall Street for that month.

“The test of substantial further progress for employment is all but met,” Powell said.

Evergrande risks?

The Fed remained optimistic about the economic recovery, with half of the FOMC’s 18 members now advocating for at least one rate hike next year. The other half see the Fed holding pat on near-zero rates through 2022.

But the FOMC acknowledged some downside risks, with the Delta variant continuing to drag on sectors most adversely hit by the pandemic.

Powell swatted down concerns over other downside risks like the spillover effect of the Evergrande, a Chinese real estate conglomerate at risk of collapsing under the weight of its own debt. The Fed chief said the issue appears to be “very particular to China” for now.

“It's something they're managing,” Powell said. “In terms of the implications for us, there's not a lot of direct U.S. exposure.”

Powell also noted the risk associated with the debt ceiling. The U.S. Treasury is burning through its cash balances to pay its bills while Congress works on raising the debt ceiling, but Treasury Secretary Janet Yellen has warned of “widespread economic catastrophe” if its balances ran dry.

The Fed chief urged Congress to raise the debt ceiling “in a timely manner,” adding that defaulting on the national debt would cause “severe” damage to the economy and financial markets.

Powell is set to testify on Capitol Hill next week as part of a follow-up on the Fed’s pandemic response, first on Sept. 28 and then again on Sept. 30.

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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