Federal Reserve Chairman Jerome Powell is readying markets for an announcement of a slowdown in its asset purchases, suggesting that the U.S. economic recovery looks fit enough to sustain reduced Fed stimulus as soon as next month.

Powell said the Fed is “on track” to begin slowing the pace of its U.S. Treasury and agency mortgage-backed securities purchases, which it is currently doing at a clip of about $120 billion a month.

He added that if economic conditions progress as expected, the Fed could bring the so-called quantitative easing program to a full stop by the middle of next year.

The central bank chief indicated that a “tapering” of asset purchases is not likely to disrupt the recovery in the labor market, where 5 million people remain out of work, compared to pre-pandemic levels.

But starting a taper would allow the Fed to position itself down the line for interest rate hikes. Since the depths of the pandemic, the policy-setting Federal Open Market Committee has pinned short-term borrowing rates at near-zero. Raising rates could be critical if inflationary pressures risk unanchoring inflation expectations away from the central bank’s 2% target.

"No one should doubt that we will use these tools to guide inflation back down to 2% over time,” Powell said at an event held by the South African Reserve Bank on Friday. “At the same time, we think we can be patient and allow the recovery to take place and allow the labor market to heal.”

Powell said inflation at the moment is above target, but expects global supply chain issues that are pushing up costs to abate over time. In the meantime, the Fed chair said monetary policy tools “don’t do much on supply constraints.”

'Market generally understands where we are'

Commentary from Powell’s other colleagues also point to an announcement of a taper at the conclusion of the central bank’s next policy-setting meeting on Nov. 2 and 3.

Fed Governors Randal Quarles and Christopher Waller both said this week they will support a taper at that meeting.

“This action should not tighten financial conditions, since a later 2021 tapering has already been priced in by most participants,” Waller said at a Stanford University event on Tuesday.

Powell on Friday said markets did not appear unprepared for tapering, a policy action which the Fed has been laboriously teasing for months. The central bank has looked to December 2013 as a cautionary tale of surprising markets on a taper, when then-Fed Chairman Ben Bernanke inadvertently triggered volatility in markets.

“I think the market generally understands where we are,” Powell said, adding that he was “not blessing every asset price or anything like that."