Jay Powell has expressed support for a faster withdrawal from the Federal Reserve’s massive asset purchase program, in comments that raised the specter of an interest rate hike next year and exacerbated a stock market liquidation.
Powell’s testimony at a congressional hearing shocked markets, which were already under pressure after Moderna’s chief executive predicted that existing vaccines would be less effective against the new variant of the Omicron coronavirus.
Responding to questions from lawmakers, the Fed chairman admitted the risk of higher inflation had increased and said the US central bank could respond by accelerating the withdrawal of the stimulus it put in place in the past. start of the pandemic.
“The economy is very strong and inflationary pressures are high,” said Powell. “It is therefore appropriate, in my opinion, to consider concluding the reduction in our asset purchases. . . maybe a few months earlier.
Powell said he expects the Federal Open Market Committee to discuss a faster cut at its next meeting, which will be on Dec. 14 and 15.
The central bank began slashing its $ 120 billion per month asset purchase program several weeks ago to $ 15 billion per month, a pace that allowed it to halt its bond purchases in June. . But Powell’s comments suggest the central bank could speed up that timeline significantly, clearing the way for him to start raising interest rates from the lowest levels.
US equity markets weakened on comments from Powell, the benchmark S&P 500 and the technology-heavy Nasdaq Composite, down 1.5%. The dollar rallied, rising 1.2% just before testimony to Congress began.
The two-year Treasury yield, among the most sensitive to monetary policy adjustments, sold off strongly, rising 0.06 percentage point to 0.54%. The yield had been as low as 0.44% earlier in the trading day. Yields rise as bond prices fall.
Traders have changed their bets on the hawkish stance they expect the Fed to take in the coming months – a turnaround from the previous four trading days, when investors had bet that the emergence of the variant Omicron would urge the central bank to take a more patient approach to raising rates.
Implied rates on federal funds futures have jumped, with markets forecasting rate hikes of just over two-quarter point by the end of next year.
Powell, who was recently appointed for a second term by President Joe Biden, acknowledged on Tuesday the risks to the U.S. economy from the increase in Covid-19 cases and the new variant. But he nevertheless adopted a much more hawkish tone on inflation and the Fed’s willingness to use its tools to bring it under control.
The Fed chairman said the price hikes that pushed inflation to its fastest pace in 30 years had spilled “much more widely” through the economy in recent months, causing a high threat of inflation. “ever higher inflation”.
While Powell has said he still expects inflation to decline “significantly” over the next year as supply and demand imbalances are resolved, he said that ‘It was no longer appropriate to describe the price pressures as “transient”.
“I think it’s probably a good time to take that word out and try to make it more clear what we mean,” Powell said.
Lowering inflation has recently become an important goal of the Biden administration, which used its early days to try to stimulate demand. He faces a huge setback from Republicans and even some Democrats on his $ 1.7 billion spending bill, amid claims he could push prices up.
Janet Yellen, United States Secretary of the Treasury, who appeared at the Congressional hearing alongside Powell, argued that the spending bill would actually reduce family spending by lowering the cost of child care. ‘children and education.
“The Build Back Better plan contains support for households to help them meet some of the heaviest and fastest growing costs they face,” she said.