Fed expected to stay cautious as economy sends mixed signals

The Federal Reserve is closely watched, but it may not make big changes at its upcoming policy meeting (AFP/Daniel SLIM)
·3 min read

With the United States on the upswing from the Covid-19 pandemic, the Federal Reserve is expected to weigh in next week on whether the economy is healthy enough to begin withdrawing stimulus measures credited with aiding the revival.

But the two-day meeting of the central bank's policy-setting Federal Open Market Committee (FOMC) beginning Tuesday ultimately may be a static event, like many others in recent months.

Analysts do not expect the Fed to immediately begin the much-expected slowing of its massive bond purchases, and while the committee will release updated economic forecasts, few big changes are expected from previous estimates released three months ago.

The FOMC "likes to prepare markets for any major change," said Joe Brusuelas, chief economist at RSM US.

When he addresses the press after the meeting, Fed Chair Jerome Powell "may choose the opportunity to signal that the tapering is coming, which would likely be a November announcement with a December start," the economist said.

The Fed took several emergency measures starting in March 2020, acting quickly as the pandemic caused the world's largest economy to collapse.

In addition to slashing the benchmark lending rate to zero, the Fed began buying massive quantities of bonds and other securities to ease lending conditions and ensure the financial system would not seize up.

Powell has said the bank could begin drawing back on those purchases by the end of the year, but experts expect them to take their time.

"I think the tapering train left the station last meeting already," said Roberto Perli, founding partner and head of global policy research at Cornerstone Macro, who also expects the bank to begin slowing its purchases in the last two months of the year.

- Better or worse? -

The FOMC will convene as the economy sends mixed signals about two of the central bank's top priorities: employment and prices.

The United States added a disappointing 235,000 new jobs last month, though there were better employment gains in prior months as Americans returned to positions lost to Covid-19 business closures or found new ones.

"The Fed is never swayed by just one report, they look at the trend and the trend is still pretty good," Perli said.

"I think they'll read the data and say we're still very much on a safe track. I don't think the data changes anything in their mind."

The rebounding economy has spurred a sharp uptick in inflation this year, but in August, the consumer price index grew at a slower pace than in prior months.

Analysts will closely examine the Fed's updated economics projections, particularly in light of the inflation spike and the Delta variant of Covid-19, which has added to uncertainty across the economy and harmed hiring and business operations.

"I'm expecting mostly a status quo statement with a downgrade to the forecast with respect to slower growth, and a slight upgrade to the forecast with respect to improved employment," Brusuelas predicted.

- Favoring the doves -

The meeting's most-scrutinized aspect will be tapering the Fed's monthly asset purchases, currently at least $80 billion in Treasury securities and $40 billion in agency mortgage‑backed securities.

However, should the economy take a turn for the worse, "The Fed can simply delay its announcement and the start of its tapering operations until later this year or more likely early 2022," Brusuelas said.

"In many ways, the evolution of the data is working in favor of the doves" who prefer lower rates and easy money policies, he added.

The Fed has said it will eventually lift the benchmark lending off zero, though it's unclear when central bankers will consider employment sufficiently healed after the pandemic caused more than 20 million job losses.

"If they're looking for 3.5 (percent unemployment) then they'll start raising rates again in 230 years," economist Joel Naroff quipped.

"If they're looking for 4.5 (percent unemployment) and still declining then I think the end of next year is reasonable."

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