Powell Bats Down Bond-Taper Talk, Warning Against an Early Exit

Federal Reserve Chair Jerome Powell sought to stamp out talk of a premature reduction in the central bank’s massive bond-buying campaign, saying “now is not the time” to hold that discussion.

“We know we need to be very careful in communicating about asset purchases,” he said Thursday during a virtual discussion. “Now is not the time to be talking about exit. I think that is another lesson of the global financial crisis, is be careful not to exit too early.”

Some of his Fed colleagues have given investors a nervous reminder of the 2013 taper tantrum by publicly debating if a strong economic recovery from the pandemic might warrant dialing back the buying later this year. Together with the outlook for moreaid after Democrats won control of Congress, that’s helped push longer yields higher.

But Powell said the economy is “far from our goals” and noted that the lesson of seven years ago — when markets were roiled and yields shot up when investors were surprised by news the Fed was thinking of paring back its bond-buying — put officials on notice that they should choose their words with care.

“Powell sure did not sound in a hurry to taper,” said Roberto Perli, partner at Cornerstone Macro LLC in Washington and a former Fed economist. “The wiser thing to do is to not put a timeline on tapering at this stage.”

The Federal Open Market Committee last month pledged to continue to make $120 billion in monthly purchases of Treasuries and mortgage-backed securities until there’s “substantial further progress” toward employment and inflation goals.

The vagueness of the guidance has led to differing interpretations among policy makers and investors, with at least four Fed presidents having said that a strong economy could prompt discussion of tapering of bonds late this year.

Other Fed officials have pushed back. Fed Vice Chair Richard Clarida said last week he didn’t forecast adjusting the buying this year and Governor Lael Brainard on Wednesday called the paceappropriate for “quite some time.”

Powell pointedly said that the guidance was deliberately not based on any date in the calendar when the Fed would think about paring back asset purchases, aimed at holding down longer-term borrowing costs. But he did promise that there would be ample warning if conditions were getting ripe to consider such a step.

‘Let the World Know’

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

Powell’s comments weighed on front-end U.S. rates and boosted long-end yields, further steepening the curve. Eurodollar futures for 2024, used to wager on where the Fed’s target rate will be, were supported, while inflation expectations — as measured by so-called Treasury breakeven rates — climbed, and the 10-year yield reached 1.13%. Stocks fell for the first time in three days, and the dollar largely maintained its decline for the day.

While the Fed chief said he was optimistic about the U.S. economy over the next couple of years, he also spelled out that it had to weather a tough winter.

Around 9 million more Americans are out of work than before the pandemic struck and the virus continues to rage across the U.S. Powell and his colleagues are committed to using all their tools to support the recovery, and last month signaled interest rates will stay near zero at least through 2023.

‘No Time Soon’

He reinforced that message Thursday, noting that the time to raise rates was “no time soon.”

After years of too-low inflation, the central bank approved new policy guidance in September, spelling out it would be appropriate to keep rates near zero until inflation has risen to its 2% target and was on track to moderately exceed that level, and hold off preemptively tightening policy even as unemployment declines to low levels.

“That wouldn’t be a reason to raise interest rates unless we see troubling inflation or other imbalances that could threaten achievement of our mandate,” Powell said. “That is a significant change.”

— With assistance by Christopher Condon, Benjamin Purvis, and Edward Bolingbroke

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