The US central bank on Wednesday set the stage to possibly start cutting some of the extraordinary support it gave to the economy during the pandemic.
One of the biggest questions facing the US economy right now is when the Federal Reserve will begin to curb its cheap money policies.
On Wednesday, the Fed set the stage to possibly start cutting back some of the extraordinary support it gave to the economy during the coronavirus pandemic.
The Fed, which is the US central bank, ended its two-day policy meeting on Wednesday by leaving its key rate unchanged. There, no big surprise. The Fed cut rates to near zero in March 2020 when the pandemic first hit the U.S. economy.
What was in question before the meeting, however, was whether the Fed would signal that it is ready to start cutting its bond purchases, which have been buzzing to the tune of $ 120 billion per month since June of the year. last.
These bond purchases help keep long-term interest rates low.
The Fed said in December that it would not start withdrawing that support from the economy until it saw “further substantial progress” towards its maximum employment and inflation targets.
“Since then, the economy has progressed towards these targets,” the Fed said in its post-meeting statement on Wednesday. “If progress continues overall as planned, the Committee believes that a moderation in the pace of asset purchases may soon be justified.”
The Fed also released its quarterly projections following its policy meeting.
The so-called “dot plot” shows that policymakers are also divided over the direction of the federal funds rate next year, with half of the 18 members now calling for the benchmark interest rate to be maintained in 2022 and the half of them seeing take off by the end of 2022.
Policymakers lowered their median forecast for economic growth this year to 5.9%, but increased it to 3.8% for 2022. In June, they called for economic growth of 7% for this year, but only 3.3% next year.
The Fed also slightly adjusted its median unemployment rate forecast. He now sees the unemployment rate drop to 4.8% this year, from a call of 4.5% in June. Its median projection for the unemployment rate next year remained unchanged at 3.8%. He still sees the country’s unemployment rate return to its pre-pandemic level of 3.5% in 2023.
Median inflation expectations have been adjusted up to 4.2% for this year and to 2.2% for 2022.
The Fed does not expect inflation to drop to 2.1% before 2024.
Inflation and the labor market
In August, the US economy created a disappointing 235,000 jobs – marking the slowest pace of job creation since January. The slowdown was mainly blamed on an increase in COVID-19 infections linked to the Delta variant of the coronavirus.
It also happened against a backdrop of record job openings in the United States. On the last day of July, some 10.9 million jobs were begging in the United States.
The Fed’s target inflation rate is 2%. That goal has proven elusive this year, as prices have soared as companies speed up operations, causing bottlenecks for labor and raw materials, and increasing shipping costs.
Some observers feared that prices would start to spiral out of control, forcing the Fed to raise interest rates and possibly derail the country’s economic recovery.
But Fed Chairman Jerome Powell insisted that he and his fellow policymakers believed this period of higher inflation would prove to be transient and prices would eventually moderate.
This position was reiterated in the Fed’s statement after Wednesday’s meeting, which noted that “inflation is high, largely reflecting transient factors.”
In July, the Fed’s favorite inflation indicator – the personal consumption expenditure index – slowed to 0.4% from 0.5% the month before.