On Wednesday, the US central bank prepared the ground to potentially reverse some of the extraordinary support it gave the economy during the pandemic.
One of the biggest questions currently looming over the United States economy is when the Federal Reserve will begin to curb its policy of cheap money.
On Wednesday, the Fed prepared the ground to potentially reverse some of the extraordinary support it gave the economy during the coronavirus pandemic.
The Fed, the US central bank, closed its two-day policy meeting on Wednesday by leaving its benchmark rate unchanged. No big surprise there. The Fed cut interest rates to near zero in March 2020, when the pandemic hit the US economy for the first time.
What the meeting questioned, however, was whether the Fed would indicate it is ready to begin phasing out its bond purchases, which have been buzzing at $120 billion a month since June last year.
Those bond purchases help keep long-term interest rates low.
The Fed said in December that it would not withdraw that support to the economy until it sees “substantial further progress” toward its maximum employment and inflation targets.
“Since then, the economy has made progress toward these goals,” the Fed said in a statement after the meeting on Wednesday. “If progress continues broadly as expected, the Committee believes that a moderation in the pace of asset purchases may soon be warranted.”
At the end of its policy-making meeting, the Fed also released its quarterly forecasts.
The so-called “dot plot” shows that policymakers are evenly split on where they think Federal Funds interest rates will rise next year, with half of the 18 members now advocating maintaining the benchmark rate in 2022 and half of them seeing rise by the end of 2022.
Policymakers lowered their average forecast for economic growth this year to 5.9 percent, but raised it to 3.8 percent for 2022. In June, they demanded 7 percent economic growth this year, but only 3.3 percent next year.
The Fed also slightly revised its median forecast for the unemployment rate. It sees the unemployment rate fall to 4.8 percent this year, compared to a June call of 4.5 percent. The median projection for the unemployment rate for next year remained unchanged at 3.8 percent. It still sees the country’s unemployment rate return to pre-pandemic levels of 3.5 percent in 2023.
Median inflation expectations were revised upwards to 4.2 percent for this year and 2.2 percent for 2022.
The Fed does not see inflation falling to 2.1 percent until 2024.
Inflation and the labor market
In August, the US economy added a disappointing 235,000 jobs, the slowest rate of job creation since January. The delay was mainly due to an increase in COVID-19 infections related to the Delta variant of the coronavirus.
It also happened against the background of record job openings in the US. On the last day of July, some 10.9 million jobs went begging in the US.
The Fed’s inflation target is 2 percent. That goal has proved elusive this year, as prices have risen as companies ramp up operations, creating bottlenecks for labor and raw materials, and increasing shipping costs.
Some observers feared that prices could spiral out of control, forcing the Fed to raise interest rates and potentially derail the country’s economic recovery.
But Fed Chair Jerome Powell is adamant that he and his fellow policymakers believe this period of higher inflation will be temporary and prices will eventually moderate.
That stance was reiterated Wednesday in the Fed’s statement after the meeting, which noted that “inflation is high, largely due to transient factors.”
In July, the Fed’s preferred inflation gauge — the Personal Consumption Expenditures Index — slowed from 0.5 percent the previous month to 0.4 percent.