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Gold price jumps above $1,800 as Powell says tapering could begin this year

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(Kitco News) The gold market saw immediate gains after Federal Reserve Chair Jerome Powell sounded more cautious than other Fed officials when talking about tapering, stating that the central bank could start reducing its $120 billion in monthly bond purchases this year.

At the time of writing, December Comex gold futures were trading at $1,809.60, up 0.80% on the day.

Powell walked a fine line between optimism and caution, noting that the U.S. economy continues to make progress towards the Fed's goals.

"For now, I believe that policy is well-positioned," Powell said at the virtual Jackson Hole Economic Policy Symposium. "My view is that the 'substantial further progress' test has been met for inflation. There has also been clear progress toward maximum employment."

When addressing a possible reduction of bond purchases, Powell said that it is likely to start happening this year.

"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," he said.

The Fed chair also balanced out all the impressive progress made on the inflation and the employment fronts, with the remaining delta variant risk.

"The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the Delta variant. We will be carefully assessing incoming data and the evolving risks. Even after our asset purchases end, our elevated holdings of longer-term securities will continue to support accommodative financial conditions," Powell stated.

Going forward, macro data out of the U.S. will be key when it comes to Fed's tapering timeline, the Powell added.

The central bank head also reminded the markets that reduction of asset purchases does not mean the Fed will be ready to start raising rates.

Powell said that the Fed has "articulated a different and substantially more stringent test" for raising rates.

"We have much ground to cover to reach maximum employment, and time will tell whether we have reached 2 percent inflation on a sustainable basis," he said.

'The ill-timed policy move slows hiring and economic activity'

When talking about inflation, Powell maintained his "transitory" view, noting that an overreaction to higher inflation numbers could do more harm than good.

"The ill-timed policy move unnecessarily slows hiring and other economic activity and pushes inflation lower than desired. Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful," he said.

Powell also stated that inflation reacts to changes in monetary policy with a lag of a year or more.

"If a central bank tightens policy in response to factors that turn out to be temporary, the main policy effects are likely to arrive after the need has passed. We know that extended periods of unemployment can mean lasting harm to workers and to the productive capacity of the economy," he said.

In the meantime, the Fed will rely on the incoming data to monitor inflation's progress, Powell added, stating that he still believes that job growth will continue and price growth will moderate.

"Central banks have always faced the problem of distinguishing transitory inflation spikes from more troublesome developments, and it is sometimes difficult to do so with confidence in real time," he noted. "If sustained higher inflation were to become a serious concern, the Federal Open Market Committee (FOMC) would certainly respond and use our tools to assure that inflation runs at levels that are consistent with our goal."

Nothing new was said

Analysts said that Powell did not say anything new, which makes the statement more dovish than expected.

"Powell's speech just repeats what we already knew from the minutes of the July FOMC meeting," said Capital Economics chief U.S. economist Paul Ashworth. "If there was really a strong push among officials to kick off the taper later this month, then surely Powell would have dropped a heavier hint today rather than just repeating what was in the July minutes."

Powell's speech makes it clear that the central bank will wait some more before starting to taper but has its sights set on the year-end.

"In terms of a formal 'go' signal, we'll see you in September, when the next FOMC meeting will have a chance to look at further readings on how the economy is holding up in the early days of the Delta variant," said CIBC World Markets chief economist Avery Shenfeld. "The bond market might be placated by the additional insights on inflation, but we still see yields moving higher once tapering is underway."

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