fomc outcome: Fed says progress made towards conditions for tapering bond buys

Federal Reserve officials indicated they have begun discussing when to tap the brakes on their robust support for the U.S. economy amid an inflation surge, even as the delta variant of the coronavirus poses a increasing threat to growth.

The central bank kept the target range for its benchmark policy rate unchanged at zero to 0.25 per cent and adjusted language to say that it had pledged in December to continue asset purchases at a $120 billion monthly pace until “substantial further progress” had been made on employment and inflation.

“The economy has made progress toward these goals, and the committee will continue to assess progress in coming meetings,” the Federal Open Market Committee said in a statement released Wednesday.

They repeated language that inflation had run persistently below the Fed’s long-run 2 per cent goal.

The Fed also announced that it established two standing repurchase-agreement facilities.

“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 separate statement.

Consumer prices are rising at the fastest pace since 2008 as the economy reopens and Americans renew spending after a year of lockdown. At the same time, the spreading delta variant of the coronavirus has jolted investors who worry it could threaten the economic recovery.

The FOMC vote was unanimous. Chair Jerome Powell will hold a virtual press conference at 2:30 p.m. in Washington.

Since last September, the Fed has set the amount of its monthly purchases of Treasuries at $80 billion and mortgage-backed securities at $40 billion to help the economy heal from Covid-19. Powell has said the Fed would begin talking about when and how to taper its bond purchases at this meeting. He’s also promised plenty of advance warning before any decision to start scaling them back.

Some officials have said they would like to begin the taper sooner rather than later, citing financial-stability concerns including the steep rise in home prices. They’ve also argued the Fed should reduce its MBS purchases at a faster pace than Treasuries because the housing market no longer needs central bank support.

The July meeting comes a month ahead of the Kansas City Fed’s annual policy retreat in Jackson Hole, Wyoming. Fed chairs, including Powell, have sometimes used the venue to signal policy shifts. The next gathering of the FOMC is Sept. 21-22.

Any move to shrink policy support will be based on progress on the Fed’s goals for jobs and inflation.

Employment has made significant strides in the past few months, with the unemployment rate falling below 6 per cent as more jobs are added and more workers rejoin the labor force. But the gains haven’t been equal for all Americans — the Black unemployment rate stood at 9.2 per cent and the Hispanic rate at 7.4 per cent in June.

While inflation is running well above the Fed’s 2 per cent target, officials have said that price spikes are likely temporary and are being driven by categories related to the economic reopening.

In addition, economists say the increased spread of the delta variant, which is now the dominant strain of coronavirus in the U.S., may weigh on growth in the second half of this year.

Variants have surpassed inflation as the biggest risk to market stability, according to Deutsche Bank AG’s monthly survey of market participants.