U.S. Fed chief stresses patience on rate hikes as tapering of asset purchases to start this month

WASHINGTON, Nov. 3 (Xinhua) -- U.S. Federal Reserve Chair Jerome Powell stressed on Wednesday that the Fed can be patient on raising interest rates as the central bank is set to start tapering its asset purchases later this month amid elevated inflation concerns.

"Our decision today to begin our tapering asset purchases does not imply any direct signal regarding our interest rate policy," Powell said Wednesday afternoon at a virtual press conference after wrapping up a two-day policy meeting.

"We continue to articulate a different and more stringent test for the economic conditions that would need to be met before raising the federal funds rate," Powell said, adding there is still ground to reach maximum employment both in terms of employment and participation.

"We don't think it's time to raise rates now. If we do conclude it's necessary to do so, we will be patient, but we won't hesitate," he said.

In a policy statement released Wednesday, the Fed pledged to keep the federal funds rate unchanged at the record-low level of near zero as widely expected.

Meanwhile, the central bank decided to begin reducing the monthly pace of its net asset purchases by 10 billion U.S. dollars for U.S. Treasury securities and 5 billion dollars for agency mortgage-backed securities later this month.

The Fed had pledged to continue its asset purchase program at the pace of 120 billion dollars per month, including 80 billion dollars in U.S. Treasury securities and 40 billion dollars in agency mortgage-backed securities, until "substantial further progress" has been made on employment and inflation.

"At today's meeting, the Committee judged that the economy has met this test, and decided to begin reducing the pace of its asset purchases," Powell said, referring to the Federal Open Market Committee (FOMC), the Fed's policy-making committee.

"If the economy evolves broadly as expected, we judge that similar reductions in the pace of net asset purchases will likely be appropriate each month, implying that increases in our securities holdings would cease by the middle of next year," he said.

Joseph Gagnon, senior fellow at the Peterson Institute for International Economics, said the Fed's decision on tapering was widely expected and well received by markets.

"Bond yields and the dollar moved very little after the announcement; stock prices rose slightly," Gagnon said, adding the current pattern of bond yields suggests that market participants expect the Fed to raise rates about half a percentage point in the second half of 2022.

However, Jay H. Bryson, chief economist at Wells Fargo Securities, believed that the FOMC will wait until 2023 before commencing a tightening cycle.

"We believe that the level of payrolls will not regain its pre-pandemic peak until the end of 2022," Bryson said Wednesday in a note.

"But we readily acknowledge that the Committee could pull forward its pace of tightening somewhat if payrolls recover more quickly than we currently forecast and/or inflation remains stubbornly high," Bryson said.

The announcement of tapering came as U.S. inflation rates remained elevated in recent months. In the 12 months through September, the core personal consumption expenditure (PCE) price index, the Fed's preferred inflation measure, rose 3.6 percent for a fourth straight month, remaining at the highest level since May 1991, according to the Commerce Department.

"Inflation is now being driven by monetary and fiscal policy being too expansionary at a time that we are running into severe supply chain problems, shipping problems, and large increases in international oil and food prices," Desmond Lachman, resident fellow at the American Enterprise Institute and a former official at the International Monetary Fund, told Xinhua.

"I do not expect those pressures to ease anytime soon and I expect that inflation will be higher than the Fed is forecasting," Lachman said, adding the tapering will not do very much to reduce inflation.

"One must remember that even with tapering, the Fed will continue to buy a lot of bonds till it ends the tapering by the middle of next year and it will keep policy interest rates at the zero bound," he said.

While it was "highly uncertain" when U.S. inflation will eventually moderate due to supply chain bottlenecks, Powell said inflation could move down by the second or third quarter of next year.

"If we were to see signs that the path of inflation or longer-term inflation expectations was moving materially and persistently beyond levels consistent with our goal, we would use our tools to preserve price stability," Powell said, noting the central bank will be watching carefully to see if the economy is evolving in line with expectations.

A Bloomberg survey released on Tuesday showed that economists are closely divided on whether U.S. interest-rate liftoff will be in 2022 or early 2023, with a slim majority estimating the latter timing.