Fed cites economic 'progress' in hint it could start reducing bond purchases

Fed cites economic 'progress' in hint it could start reducing bond purchases
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The Federal Reserve hinted about tapering its massive monthly government bond purchases on Wednesday after acknowledging the economy has made progress.

Fed Chairman Jerome Powell and the rest of the Federal Open Market Committee concluded a two-day meeting on Wednesday in which they discussed a timeline for when the central bank should begin tapering its purchases of government bonds, which would be a first step toward reversing the emergency easy-money policies put in place during the depths of the pandemic recession.

After the meeting, the Fed announced that it once again decided to hold to its controversial course of keeping interest rates at near-zero levels and to continue its asset purchases. In a statement after the meeting, the central bank pointed out that last December, the committee said it would continue to purchase at least $80 billion in Treasury securities and $40 billion in agency mortgage-backed securities per month until "substantial further progress" has been made toward inflation and employment goals.

"Since then, the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings," the committee said on Wednesday.

The meeting comes after the Department of Labor announced that consumer prices increased 5.4% for the year ending in June, the highest rate of inflation since 2008. The numbers were well above forecast expectations of 4.9%.

The Fed has kept interest rates at their current level since the start of the pandemic, a stance that is becoming ever more contentious as the economy continues to rebound. Powell has said that he and central bank officials intend to keep with easy-money policies until sustained inflation reaches 2% and U.S. employment rates have peaked.

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While inflation has already breached 2% (the Fed predicts it will be transitory), gains in employment have not yet moved the unemployment rate to its pre-pandemic levels. The economy added 850,000 new jobs in June, above forecasters' predictions of 700,000. Still, unemployment slightly increased from 5.8% to 5.9% in June — far above February 2020’s 3.5% rate.

During the last meeting of the Federal Open Market Committee, officials projected that they would begin raising rates by 2023. During the June meeting, the central bank also acknowledged rising inflation by bumping up its end-of-the-year projection from 2.4% to 3.4%, although it still predicts it will fall to 2.1% in 2022 and hold steady at its 2% target in the longer run.

Greg McBride, chief financial analyst at Bankrate, said after the meeting that the Fed has “lobbed the first verbal volley on tapering,” adding that the Fed is operating on the notion of, “Say something, but promise nothing.”

Treasury Secretary Janet Yellen generated headlines recently when she predicted “several more months of rapid inflation” during a mid-July interview. She said that the U.S. will have to keep a “careful eye” on the burgeoning prices, but, like the Fed, asserted that inflation would begin declining over the medium term.

The potential impact of the delta variant of COVID-19 on the economy was also likely on the docket during this week’s Fed meeting. The variant, which is more contagious than other strains, has already caused the Centers for Disease Control and Prevention to revise its guidance on indoor mask usage and has sparked anxiety about potential policy changes should cases continue to increase.

There are concerns that state and local governments might decide to reimpose restrictions on businesses, which could result in tamped-down inflation but also a further stifling of the country’s economic rebound from last year’s two-month recession.

Despite the delta dread, some are still quite bullish on the prospects for continued economic expansion. Famed investor Bill Ackman recently said he thinks the U.S. will experience a “massive” economic boom and strong economy moving into the fall.

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The Fed meeting and Powell’s press conference come one day before the Bureau of Economic Analysis releases its gross domestic product data for the second quarter.

The amount of GDP growth will be closely examined considering this is the first full quarter since President Joe Biden was sworn in and will reflect the impact that the administration’s $1.9 trillion COVID-19 spending package has had on the economy. The first quarter saw 6.4% growth, and forecasters predict that to have increased to 8.5% during the second quarter.

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Tags: News, Inflation, Interest Rates, Federal Reserve, Jerome Powell, Finance and Banking, Business

Original Author: Zachary Halaschak

Original Location: Fed cites economic 'progress' in hint it could start reducing bond purchases

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