Colin Powell: the Fed will not raise interest rates quickly. Now is not the time to talk about exiting QE.

During the online event at Princeton University, Federal Reserve Chairman Colin Powell said the Fed would not raise interest rates without disturbing inflation and imbalances. The time for interest rate hikes will not come soon.

"when it comes time to raise interest rates, we will certainly act, and that time will not come soon (no time soon)."

"unless we start to see inflation or other imbalances threaten the fulfilment of our [inflation and employment] mission, there will be no reason to raise interest rates."

Powell said that before the novel coronavirus epidemic was hit, there was no obvious imbalance that threatened the US economy. Rapid and strong fiscal and monetary action is not unprecedented. The fiscal stimulus during the recession is not enough. Follow-up fiscal action is the key. At the same time, Powell also reduced the possibility that the Federal Reserve will reduce its QE in the near future.

The commentary said that Powell's remarks imply that the Fed will keep money loose in the foreseeable future. As long as inflation stays low, the Fed will not raise interest rates.

Some media have pointed out that one of the imbalances mentioned by Powell is what a small number of Fed officials have been wary of recently, saying that inflation may pick up faster than the Fed expected. That could force the Fed to withdraw some easing measures sooner than expected.

The economic recovery may be much faster than expected before the QE is reduced. Powell said now is not the time to talk about withdrawing from easing. The economy is far from achieving its goal. Investor panic over the Fed's cutback in QE (Taper Tantrum) highlights the market's sensitivity to the Fed's adjustment to bond purchases. The Fed needs to communicate with the outside world very carefully about bond purchases, and the Fed's policy will be very transparent. As to when it is indeed appropriate to discuss tapering, the Fed will clearly let the world know in advance.

Powell said one of the lessons the Fed learned after the 2008 financial crisis is to "not withdraw prematurely" support for the economy, and to be careful.

Powell is optimistic about the US economy in the next few years, saying that the economy may soon return to its pre-epidemic peak. Strong fiscal and monetary support could help the US economy recover "much faster than we had feared".

Before Powell's speech, the three major US stock indexes rose collectively on Thursday on the news that Biden might launch a new $2 trillion stimulus. The Dow and Nasdaq hit new intraday highs, S & P was close to record highs, and 10-year US bond yields stood firmly above 1% and hovered at 10-month highs. Due to the uncertainty created by novel coronavirus's epidemic, fluctuations in financial markets, and recent differences among Fed officials on withdrawing from QE in the future, investors are eager to seek guidance through Powell's statement.

According to the minutes released on Wednesday, Fed policy makers began to discuss "(taper)" QE, at the December monetary policy meeting, the first time that reduction has been mentioned in the minutes of the meeting since Powell became chairman. Some Fed officials believe that as long as the Fed makes substantial further progress in its employment and inflation targets, it can begin to "phase out" its bond purchases and phase out QE as it did in 2013-2014.

During the discussion, some officials thought the Fed might start reducing QE before the end of the year, according to the minutes. Since then, a number of senior Fed officials have shown different positions.

Bostic, chairman of the Atlanta Federal Reserve, said that if the vaccine promotion improves the economic outlook, debt purchases may be reduced this year, and he is open to starting the reduction this year. Kaplan, chairman of the Dallas Fed, takes a similar view. Harker, chairman of the Philadelphia Federal Reserve, said the potential contraction would occur at the end of 2021 or early 2022.

Federal Reserve Vice Chairman Clarida said that he does not think the Federal Reserve will begin to reduce the size of bond purchases before the end of this year, nor does it support an immediate adjustment of the duration composition of bond purchases, and is not worried about a weaker dollar and a sharp rise in US bond yields.

Fed governor Brainard said on Wednesday that the Fed is likely to continue its massive bond-buying program "for quite some time" because the U.S. economy is still "a long way from the Fed's jobs and inflation targets." Bullard, chairman of the Federal Reserve of St. Louis, said on the same day that although the US economy may recover later this year, it is too early to discuss when the Fed will take measures to reduce easing.

Low inflation is more troublesome. Short-term price increases are not sustained inflation. On the inflation front, Powell once again stressed the importance of core PCE inflation, believing that inflation in the US economy is persistently low. The inflation situation has not changed any time soon. Too low inflation adds too much danger. Low inflation is a more difficult problem to solve than high inflation.

Powell expects that strong "exciting" spending as a result of the receding epidemic will put upward pressure on prices. Prices in the United States may rise in the short term. But an one-off rise in prices does not mean persistent inflation. 'If inflation moves in an unpopular direction, the Fed has the tools to respond and will respond with them,'he said.

Powell commented that the new policy framework launched in August last year has well anchored US inflation expectations. "A great deal of evidence" suggests that the market has adapted to the policy framework launched by the Fed in August. The Fed will judge the situation flexibly rather than mechanically based on mathematical formulas. The public will need to see US inflation stay above 2.0 per cent for some time.

There is a long way to go in the recovery of the job market, the high level of public debt does not affect monetary policy in the study of stable currency risk. Referring to another big goal of the Fed, full employment, Powell said, "We still have a long way to go to achieve full employment." the Fed is focused on restoring the strength of the US labour market. The Fed talks more about issues related to inequality because it believes that such issues are "directly related to the Fed's goal of achieving full employment".

Mr. Powell said private sector leverage will not stop the Fed from tightening money. We have not seen a big increase in corporate defaults. The debt burden of the US federal government is not at a historic high, the federal debt path is not sustainable, and the debt growth rate is faster than the economic growth rate. The level of public debt in the United States is on the high side, but that will not affect the monetary policy of the FOMC.

Powell also mentioned digital money, saying that the central bank's digital money is something the Fed takes seriously. Stable currencies may become systemically important overnight. The Fed is currently studying the risks associated with stabilizing the currency, which is a high priority.