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Powell says tapering could be necessary this year as dollar and gold rise

Jay Powell firmly suggested on Friday that the US Federal Reserve could begin to pull back on its large-scale pandemic-induced stimulus measures this year.

The Fed chair said that the bank has completed one of its two goals required to justify decreasing its support, adding that “progress” was being made on the other.

Powell reaffirmed his view that the US economy has rebounded strongly following the pandemic, while he said he is confident America is heading in the right direction to pull back on its high levels of support.

“My view is that the ‘substantial further progress’ test has been met for inflation,” Powell said on Friday. “There has also been clear progress toward maximum employment.”

Previous report suggests that officials at the Fed think that now is an appropriate time to begin “tapering” the bond-buying measures this year, which Powell has now agreed with.

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“This year’s Jackson Hole agenda has focused on the word “uneven” and is reading ever more altruistic”, said Hinesh Patel, portfolio manager at Quilter Investors. “Monetary policy setters, researchers and influencers will be discussing frameworks that will influence our lives over the next decade, not just to get us through the pandemic. Powell’s speech is evidence that central banks are looking beyond the surge in Delta cases globally.”

“Since the global financial crisis, monetary policy and fiscal policy have been at a tug of war but today they clearly operate in tandem akin to synchronised swimming. The Federal Reserve has clearly decided now is the time for the fiscal response to take up more of the slack,” said Patel.

“Powell has been incredibly clear that tapering is coming later this year and they should now be prepared enough to avoid any sort of tantrum. But central banks will have to ultimately hold the hands of financial markets as we transition to a new era of monetary policy to ensure credit conditions remain optimal.”

Dollar

The US Dollar Index (DXY), which measures the greenback against a range of competing currencies, rose to 92.79 on Friday, a new four-day high.

The index made additional ground in response to aforementioned hawkish remarks from Powell.

The greenback surged until the beginning of this week, with the dollar index hitting a nine-month-high of 93.734 on Friday, on fears over the Delta variant’s economic impact.

Vasileios Gkionakis, global head of FX strategy at Lombard Odier Group, told Reuters that there’s been skittishness over growth and sector rotations, which has boosted the dollar because of its safe-haven status.

“In the short term, we’re still going to be trading in ranges, with upside bias,” Gkionakis added.

Gold

As Jerome Powell made his remarks about potentially pull stimulus measures this year, the price of gold rose to $1,800 per ounce.

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