The Federal Reserve signalled it was moving closer to the moment when it will withdraw its support for the economic recovery by tapering its asset purchases, declaring that “progress” had been made towards meeting its goals.
At the end of a two-day meeting on Wednesday, the Federal Open Market Committee kept its main interest rate close to zero and said it would continue buying $120bn in debt per month until “substantial further progress” was made on the recovery compared to last December.
But the Fed offered new guidance on its planned “tapering” of the bond buys it introduced last year at the height of the pandemic, saying the conditions for a move would be evaluated later this year.
“Since [December], the economy has made progress toward these goals [of price stability and full employment], and the committee will continue to assess progress in coming meetings,” the FOMC said.
The FOMC meeting comes at a time of conflicting economic signals. Inflation data has been higher than expected since US central bank officials last met in June, while the spread of the Delta variant across the US has renewed concerns about the labour market and growth.
“With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have shown improvement but have not fully recovered. Inflation has risen, largely reflecting transitory factors,” the FOMC said.
The US central bank planned to ramp up discussions on the tapering of asset purchases at this meeting. Jay Powell, the Fed chair, needs to forge a consensus on the timing, conditions and details of a move to slow its support for the recovery, likely later this year or in early 2022. Powell has taken a cautious approach to reducing the Fed’s monetary stimulus so far, even as more hawkish officials have pushed for swifter action.
Last month’s FOMC meeting was marked by big upgrades to economic projections from Fed officials, including forecasts for earlier interest rate increases. But the spread of the Delta variant in recent weeks may result in a need for greater patience from the Fed, particularly if it leads to reduced activity among consumers and the reintroduction of restrictions designed to curb transmission.
Soaring infection rates, particularly among the unvaccinated, prompted US health officials on Tuesday to perform a U-turn on their masking recommendations for people who have been fully jabbed. The Centers for Disease Control and Prevention said vaccinated people should now cover their faces when indoors in areas with substantial levels of Covid-19.
Recent gyrations in US government bond prices reflect in part concerns about the Delta variant and the potential hit to growth. Treasuries rallied sharply in recent weeks even though Fed officials signalled last month an earlier lift-off in interest rates in their projections. Yields on the benchmark 10-year note have in turn fallen, hovering around 1.26 per cent on Wednesday.
The Fed also announced the establishment of two permanent facilities that would allow eligible domestic and foreign market participants to swap Treasuries and other short-term securities for cash — tools that had been endorsed this week by a group of heavyweight former policymakers as a way to ensure ample Treasury liquidity, especially during periods of stress.
The maximum operation size for the so-called standing repo facility was set at $500bn, with a minimum bid rate of 0.25 per cent, and the list of counterparties, which currently includes primary dealers who underwrite Treasury debt sales, will be expanded over time.
“These facilities will serve as backstops in money markets to support the effective implementation of monetary policy and smooth market functioning,” the Fed said in a statement.