Advertisement
Macroscope | US Federal Reserve’s balancing act on tapering risks is pleasing no one
- Powell’s ‘tapering is not tightening’ strategy has cheered financial markets and so far eased fears of a repeat of 2013’s ‘taper tantrum’
- By trying to please those who fear it might move too quickly as much as those who fear the opposite, the Fed could end up disappointing everyone
Reading Time:3 minutes
Why you can trust SCMP
Spare a thought for Jerome Powell. As the head of America’s central bank – the world’s monetary guardian in all but name – the chairman of the US Federal Reserve has the toughest job in global finance.
Not only must Powell build a consensus on how best to fulfil the Fed’s dual mandate of price stability and full employment – objectives that have become much more difficult to reconcile since the Covid-19 pandemic erupted – he has to maintain the confidence of international investors, who are hypersensitive to shifts in Fed policy.
That Powell’s future at the Fed is uncertain adds to the pressure on the world’s top policymaker to devise a credible strategy for withdrawing monetary stimulus. US President Joe Biden will soon announce whether he will reappoint him for a second four-year term starting in 2022.
Advertisement
The challenge is particularly daunting, given the opposing forces at play in the US economy. Rapidly-building inflationary pressures threaten to be more persistent than the Fed anticipates, coupled with economic scarring from the pandemic that has put 6 million more Americans out of work since the virus struck.
The Fed is also determined to avoid another policy-induced shock akin to the “taper tantrum” in 2013. This is why Powell has opted to steer a middle path in dialling back monetary support, one that seeks to differentiate between curtailing asset purchases and raising interest rates.
When he spoke at this year’s virtual Jackson Hole symposium in Wyoming last Friday, he tried to delink tapering from tightening. Powell said the timing and pace of the reduction in asset purchases was not “intended to carry a direct signal regarding the timing of interest rate lift-off”.
Advertisement
Select Voice
Choose your listening speed
Get through articles 2x faster
1.25x
250 WPM
Slow
Average
Fast
1.25x