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The pressure is on for Powell and the Federal Reserve to manage the exit from ultra-easy policies

For the Federal Reserve, implementing the easiest monetary policy in the institution’s history was tough enough. Getting out will be no treat, either.

That is what the central bank faces on its road ahead.

Investors on Friday will hear more on what Fed Chairman Jerome Powell thinks about the economy. They’re also expecting to get at least a few more clues on how he will guide the central bank’s exit from the measures it took to rescue the nation’s economy from the Covid-19 pandemic. He will deliver a speech in conjunction with the Fed’s annual Jackson Hole conference, which again will be held virtually this year.

First on the Fed’s docket is pulling back on the money printing – the $120 billion or so of bonds it buys each month to stimulate demand and drive down long-term interest rates.

After that, the road gets rougher.

At some point, the Fed will look to raise short-term interest rates off the near-zero anchor where they’ve sat since March 2020. Getting rates back to normal didn’t end well for the Fed the last time it attempted to do so from 2015-18, as it had to stop in mid-cycle amid a slumping economy.

“Every Fed change in monetary policy is important,” TD Securities global head of rates strategy Priya Misra said. “But I think it’s particularly more meaningful today because we know growth is slowing and the Fed is trying to exit.”

Fed officials themselves expect noticeably slower growth in the years ahead at a time when both monetary and fiscal policy will be tighter. That raises more questions about whether Powell and his cohorts can get the exit right.

 

Depending on the Fed

The Fed and markets have been joined at the hip for a long time, but especially in the era of quantitative easing and zero interest rates that began in 2008. Stocks slumped badly at the start of the pandemic but then rebounded as soon as the Fed ramped up the bond buying.

The market recovered its losses after the first taper began, and it kept climbing through the rate-hike cycle until late 2018, when a series of Powell communication missteps sent investors reeling.

 

Covid-19 is casting some doubt on where growth is headed. But several regional Fed presidents who spoke to CNBC this week said the virus seems to be having little impact on growth and for now isn’t weighing on their economic forecasts.

 

Reference: CNBC
Read More: https://www.cnbc.com/2021/08/26/the-pressure-is-on-for-powell-and-the-federal-reserve-to-manage-the-exit-from-ultra-easy-policies.html