Powell’s Fast-Taper Signal Presages Agile Fed on 2022 Rates

Jerome Powell’s pivot toward a quicker withdrawal of stimulus paves the way for a more agile Federal Reserve in 2022, one that’s willing to raise interest rates faster than expected if inflation lingers or hold back if the pandemic worsens.

Powell, recently picked for another four years as chair, is responding to hot readings on the economy that caught officials by surprise, including signs that inflation is spreading and labor supply is still limited despite falling unemployment.

Investors can expect stepped-up Fed communication of an evolving outlook for employment and inflation that stresses flexibility amid uncertainty over the pandemic and new virus strains. The ultra-gradual normalization that marked the Fed’s retreat from stimulus after the 2008-2009 financial crisis is not a template for this Fed, which is facing something policy makers haven’t had to confront in decades: booming growth and soaring prices.

“They are shifting,” said Anna Wong, chief U.S. economist at Bloomberg Economics and a former Fed Board staffer. “What we are seeing is more weight being put on the discretionary part of policy-making, given the large forecast errors on inflation.”

Powell told U.S. lawmakers last week it was time to “retire” the Fed’s description of high inflation as “transitory,” a stance it held fast to for most of 2021 and which left it doling out stimulus even as some called for it to pull back on as inflation accelerated.