On The Money: Powell signals Fed will soon cut stimulus

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THE BIG DEAL—Powell signals Fed will soon cut back on stimulus: Federal Reserve Chairman Jerome Powell said Friday that inflation has risen enough to warrant a reduction in the central bank’s support for the recovering economy, potentially by the end of the year.

In a Friday virtual speech, Powell said that the rate of price increases had achieved the “substantial further progress” necessary for the Fed to begin reducing its $120 billion in monthly bond purchases, and he expects the labor market to strengthen to that point as well soon.

“At the FOMC’s recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year,” Powell said, referring to the Federal Open Market Committee, the Fed’s monetary policy arm.

The background: Powell’s speech comes as the Fed faces growing pressure from some central bank officials, lawmakers and economists to begin cutting back on monetary support for the economy nearly a year and half after the onset of the COVID-19 pandemic.

• The Fed in March 2020 cut its baseline interest rate range to 0 to 0.25 percent and pledged to purchase at least $120 billion each month in Treasury and mortgage bonds to stabilize financial markets amid the onset of the pandemic. 
• While experts say those efforts helped prevent a deeper crisis and clear a path for a faster recovery, a growing number of Fed officials and economists think it’s time for the bank to taper, with inflation persisting well above its target level.

Powell’s view: Inflation as measured by the personal consumption expenditure price index, the Fed’s preferred gauge, rose 0.3 percent in July and 4.2 percent annually last month, according to data released Friday. The Fed’s target level of inflation is an annual average of 2 percent.

“Inflation at these levels is, of course, a cause for concern. But that concern is tempered by a number of factors that suggest that these elevated readings are likely to prove temporary,” Powell said, reiterating a case that he, White House economic officials and many other economists have made for months.

I explain why here.

LEADING THE DAY

Democrats brace for new spending fights over Biden agenda: Democrats are bracing for intraparty fights over crafting a multitrillion-dollar package to advance President Biden’s agenda.

• The House this week adopted a $3.5 trillion budget plan that paves the way for lawmakers to pass the forthcoming legislation without any Republican votes. 
• But the approval of the budget measure came after Speaker Nancy Pelosi (D-Calif.) was pressured into striking a deal with a group of moderate Democrats who were threatening to derail the party’s spending plans.

Democrats are now expecting further challenges in getting consensus in their caucus as they draft and attempt to advance the spending bill. Congressional Democratic leaders and top committee members will need to balance the priorities of moderates and progressives, as well as House members and senators, since nearly every Democrat will need to vote for the bill in order for it to pass.

“A margin this close, any four people who feel strongly enough right now can upset the cart,” Rep. Lloyd Doggett (D-Texas), a senior member of the House Ways and Means Committee, told reporters Tuesday. “It is a question of the fact that nobody really gets it all their way.”

The Hill’s Naomi Jagoda has more on the road ahead here.

GOOD TO KNOW

• The White House is projecting that the budget deficit this year will reach nearly $3.12 trillion, according to numbers released by Friday.
• The Cuban government said Thursday that it will begin to allow citizens to use cryptocurrencies, while imposing regulations for the currencies.
• Former Sen. Heidi Heitkamp (D-N.D.) is leading a new effort to push back against proposals to tax capital gains at death, as the Biden administration and Democratic lawmakers seek to make such a change to help pay for their spending priorities.
• President Biden announced Friday that he is giving all civilian federal employees a pay raise effective Jan. 1.

ODDS AND ENDS

• The select House committee investigating the Jan. 6 attack on the Capitol sent letters to 15 websites and tech companies Friday demanding records related to the deadly insurrection.
• General Motors is requiring its salaried employees to provide their vaccination status to inform the company’s safety protocols for the future.