Eighteen months after the pandemic began, Jerome H. Powell offered the clearest sign yet that the Federal Reserve is poised to withdraw some of the support it has given to the economy soon if conditions improve. The Fed chairman made it clear, however, that rate hikes are a long way off and that the central bank is closely monitoring the risks posed by Delta.

The Fed has sought to boost economic activity by buying $ 120 billion worth of government bonds every month to keep many types of credit cheap, and officials are actively discussing when to slow those purchases. They said they would like to “make significant further progress” towards stable inflation and full employment before they do.

Mr. Powell, speaking at a closely watched conference the Kansas City Fed hosts each year, used his remarks to state that he believed the Fed had made sufficient progress on inflation and “clear progress towards it.” maximum employment ”.

The Fed chairman said that “I felt, like most of the participants in the July policy discussion, that it might be appropriate to slow the pace of asset purchases this year if the economy performs broadly as expected.”

However, Mr Powell stressed that the Fed is closely monitoring the risks associated with the Delta variant – which resulted in the conference he is speaking at having to be held online instead of in person in Jackson Hole, Wyoming, and underscored the threat, which it represents health not only to the public but also to economic activity as it prevents a return to normal life.

The Fed wants to avoid overreacting to a recent surge in inflation, which it believes will most likely prove temporary at a time when risk is looming, as it could leave workers on the sidelines and consume the potential of the economy.

“Today, with the labor market still in a significant slump and the pandemic ongoing, such a mistake could be particularly damaging,” Powell said after going through the reasons the central bank expects recent rapid gains to wear off and the Low inflation tendencies will decline will return.

The Delta variant colors the backdrop that Mr Powell speaks against: Economists aren’t sure how much it will slow growth, but many fear that it could cause consumers and businesses to pull out as it plans to return in the offices thwarted and schools and day-care centers are threatened with closure. This could lead to a slower job recovery at a time when around six million jobs are missing compared to pre-pandemic employment levels.

Economists believe the central bank could start slowing its bond purchases in November or December, a process commonly known as tapering. The anticipated withdrawal would be the central bank’s first step in moving away from the cheap money policies it has used to fuel growth and help the economy recover from the blow it suffered at the start of the pandemic . Fed monetary policy makers have also kept rates near zero since March 2020, but they have signaled that the bar is higher for a rate hike than for slowing bond purchases.

Mr Powell made it clear that the slowdown in bond purchases is not a sign that the Fed is ready to hike rates anytime soon.

“We still have a lot to do to get maximum employment and time will tell if we have sustained inflation of 2 percent,” he said.

Updated

Aug. 27, 2021, 11:00 a.m. ET

Mr Powell announced at the Jackson Hole conference last year that policymakers would no longer raise interest rates simply because the labor market is accelerating and inflation is expected to accelerate as part of a revision of the Fed’s monetary framework. Since then, officials have made it clear that they want the labor market to return to full employment before quotas rise from rock bottom – a milestone most officials say their economic projections aim to hit by June by the end of 2023.

“Labor market conditions are improving but turbulent, and the pandemic continues to threaten not only health and life, but economic activity as well,” Powell said Friday.

Central bankers’ patience is being tested by unusual economic conditions. Government spending in response to the pandemic has helped consumers amass huge savings, and they have spent steadily. The hot demand for goods and services collided with constrained supply chains disrupted by pandemic lockdowns and labor shortages in key industries. These conditions combine with data cravings to drive inflation up, at least temporarily.

The Fed’s preferred price index, the consumer spending index, rose 4.2 percent last month year over year, according to data released by the Commerce Department on Friday. The increase was higher than the 4.1 percent jump economists forecast in a Bloomberg poll, and the fastest pace since 1991. That is far higher than the central bank’s 2 percent target they had over the course of the year Trying to achieve time on average.

“The rapid reopening of the economy has driven inflation sharply higher,” said Powell, calling the latest readings “well above our longer-term target of 2 percent.”

Fed policy makers are discussing how to interpret the current price breakout. Given that these are categories of goods and services that have obviously been hit by the pandemic and supply chain disruptions, including used cars and airline tickets, most expect today’s hotter inflation to subside over time. However, some fear that the process will take long enough to raise consumer expectations of future inflation, leading them to demand higher wages and, in the longer term, faster price increases.

Other officials fear that today’s hot prices are more likely to give way to slower gains once the pandemic-induced disruptions are resolved – and that long-term trends that have dragged inflation down for decades, including the aging of the population, will bite again. They warn that if the Fed overreacts to today’s surge in inflation, inflation could be persistently weak, similar to what Japan and Europe have done.

Slow gains sound like good news to anyone who buys oat milk and eggs, but it can start a vicious circle downwards. The interest rates include inflation. So if it slows down, Fed officials will have less leeway to make cheap money during troubled times to sustain growth. This makes it difficult for the economy to quickly recover from downturns, and long periods of weak demand drag prices even lower – leading to a cycle of stagnation.

“While the underlying global disinflationary factors are likely to move over time, there is little reason to believe that they have suddenly reversed or weakened,” said Powell. “It is more likely that they will continue to weigh on inflation once the pandemic goes down in history.”

He also explained in detail what the Fed is monitoring in terms of prices, stressing that inflation “so far” has come from a narrow group of goods and services. Officials are keeping an eye on the incoming data to ensure that prices for durable goods such as used cars – which have recently hit the road – are slowing down and even falling.

Powell said the Fed saw “little evidence” of wage increases that could threaten high and sustained inflation. And he pointed out that inflation expectations have not risen to undesirable levels, but instead have orchestrated a “welcome reversal” from their earlier unhealthy decline.

Still, there was a tone of vigilance in his remarks.

“We would be concerned about signs that inflationary pressures are spreading across the economy,” he said.