Fed says economic recovery remains on track despite COVID-19 surge

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The U.S. economic recovery is still on track despite a rise in coronavirus infections, the Federal Reserve said on Wednesday in a new policy statement that remained upbeat and flagged ongoing talks around the eventual withdrawal of monetary policy support.

In a news conference following the release of the statement, Fed Chair Jerome Powell said the U.S. job market still had “some ground to cover” before it would be time to pull back from the economic support the U.S. central bank put in place in the spring of 2020 to battle the coronavirus pandemic’s economic shocks.

“I would want to see some strong job numbers” in the coming months before reducing the $120 billion in monthly bond purchases the Fed continues to make, he told reporters.

But Powell also downplayed, at least for now, the risk that the renewed spread of the coronavirus through its more infectious Delta variant will put the recovery at risk or throw the Fed off track as it plans an exit from crisis-era policies.

“It will have significant health consequences” in the areas of the country where outbreaks are intensifying, Powell said. Yet in the prior waves of coronavirus infections “there has tended to be less in the way of economic implications … It is not an unreasonable expectation” that would remain the case this time, he added.

“It seems like we have learned to handle this,” with progressively less economic disruption, Powell said, even as he acknowledged a fresh outbreak might to some degree slow the return of workers to the labor market or disrupt planned school reopenings in the fall.

The Fed’s policy statement, issued after the end of a two-day policy meeting, reflected that confidence as the central bank continues debating how to wind down its bond purchases.

There appeared to be progress in that discussion, though no clear timetable for reducing the bond purchases. Powell said there was “very little support” for cutting the $40 billion in monthly purchases of mortgage-backed securities “earlier” than the $80 billion in Treasuries, and that once the process begins “we will taper them at the same time.”

Overall, however, the Fed seemed unfazed by spread of the Delta variant, even though new daily coronavirus infections have roughly quadrupled since the Fed’s June 15-16 policy meeting.

“With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen,” the central bank said in its statement.

Though vaccinations have slowed - and Powell plugged inoculation as the best chance to get the economy durably back to normal - the Fed said it still expected vaccinations to “reduce the effect of the public health crisis on the economy.”

That should translate into strong job growth, Powell said, and eventually allow the Fed to move away from its crisis-era programs.

In December, the Fed said it would not change its asset-buying program until there had been “substantial further progress” in repairing a labor market that was then 10 million jobs short of where it was before the pandemic.

That number is now below 7 million, and the Fed for the first time acknowledged the economy had taken a step towards its benchmark for trimming the purchases.

“The economy has made progress, and the (Federal Open Market) Committee will continue to assess progress in coming meetings,” the Fed said in language pointing towards a possible reduction in bond purchases later this year or early in 2022.

The Fed also said that higher inflation remained the result of “transitory factors,” and was not an imminent risk to the economy or the Fed’s policy plans.

‘MORE UPBEAT’

Along with leaving its bond-buying program unchanged, the central bank on Wednesday kept its overnight benchmark interest rate near zero.

Karim Basta, chief economist at III Capital Management, said the “incrementally more upbeat” policy statement opened the door to a September bond taper announcement if job growth comes in strong and the coronavirus caseload does not dent spending.

Acknowledging some progress towards their goals “seems designed to give them the option to announce” as soon as September their plans for winding down the bond purchases, he wrote.

The S&P 500 (.SPX) index, which was modestly lower before the release of the policy statement, ended the session flat. Yields on U.S. Treasuries fell in choppy trading, while the dollar (.DXY) was slightly weaker against a basket of currencies.

US economic recovery ‘making progress’, says Fed

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Federal Reserve chair Jerome Powell

The US central bank has said that the economy is making progress due to widespread vaccinations.

The Federal Reserve kept interest rates on hold near zero, saying that inflation largely reflected factors that would pass in time.

While jobs growth and the economy had strengthened, “risks to the economic outlook remain”, it said.

The central bank will continue to monitor economic progress before easing pandemic support.

The announcement, following the end of its two-day meeting, comes amid concerns that rising prices could prompt the Fed to push up interest rates, increasing the cost of borrowing for businesses and consumers.

Inflation, which measures the rate at which the prices for goods and services increase, continued to surge in the US in June as the cost of energy and used cars in particular increased.

Consumer prices jumped 5.4% in the 12 months to the end of June, up from 5% the previous month.

It marked the biggest 12-month increase since August 2008, according to the US Labor Department.

The Fed’s chairman Jerome Powell has insisted, however, that cost increases would be “transitory” due to prices ticking up in areas associated with the economy reopening such as travel or hospitality, as well as supply bottlenecks.

What is inflation?

Inflation is the rate at which the prices for goods and services increase.

It’s one of the key measures of financial well-being because it affects what consumers can buy for their money. If there is inflation, money doesn’t go as far.

It’s expressed as a percentage increase or decrease in prices over time. For example, if the inflation rate for the cost of a litre of petrol is 2% a year, motorists need to spend 2% more at the pump than 12 months earlier to get the same amount.

And if wages don’t keep up with inflation, purchasing power and the standard of living falls.

Story continues

Read more about inflation - and why it matters - here.

The US central bank reiterated that it would not stop providing support until it makes “substantial further progress” towards its targets of returning to full employment and inflation at 2%.

But the statement it issued on Wednesday suggested that these goals were on track.

The Federal Open Market Committee (FOMC) said: “The economy has made progress toward these goals, and the committee will continue to assess progress in coming meetings.”

Its support includes continuing to buy bonds - a type of investment where investors lend money to the government - at a rate of $120bn (£85.6bn) per month.

The central bank said the support means that households and businesses can access credit more easily during a time of uncertainty.

Richard Flynn, UK director at Charles Schwab, said: “Strong data may suggest tighter policy is forthcoming.”

The economic recovery has been uneven in the US, the Fed has said previously

But Mr Powell said that the labour market still has “a ways to go” in terms of a full recovery.

“We’re not there. And we see ourselves as having some ground to cover to get there,” he said.

The Fed’s chief had previously said that maintaining stimulus was important because the “economic downturn has not fallen equally on all Americans, and those least able to shoulder the burden have been hardest hit”.

In the US, employment is still about 7 million jobs short of where it was before the start of the coronavirus crisis last year, while additional unemployment support is being wound down and a national rent moratorium is coming to an end on Saturday.

The Fed also cautioned that its actions would depend on the path of the pandemic - just one day after the Centers for Disease Control and Prevention (CDC) advised that Americans living in areas seeing new surges of Covid-19 should wear masks indoors again to prevent the spread of the Delta variant.

There were 89,418 new cases on Monday in the US, Johns Hopkins University reported.

UK’s economic recovery from Covid stalled in June amid ‘pingdemic’

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Britain’s recovery from the pandemic slowed last month as shortages of goods supplied to factories, building sites and shops began to take their toll on growth and increasing numbers of workers across the country were forced to isolate after being pinged by the NHS app.

According to the Guardian’s monthly snapshot of economic developments, there was a slowdown in economic growth in June, which could continue if the Delta variant continues to hamper business activity.

Construction companies reported a second month of declining activity as the combined impact of EU staff returning home following Brexit and a shortage of materials hit their ability to maintain previously high levels.

Overall retail footfall in mid-July was three-quarters of the level recorded in the equivalent week of 2019, prior to the pandemic, reflecting continued caution among shoppers as Covid infection rates remained high.

Financial markets took a dive last week in response to concerns that governments were struggling to suppress the Delta variant and fears the highly contagious strain of the coronavirus would persist into the autumn.

A more recent improvement in the infection rate following a halving of reported cases in the UK helped markets recover some losses this week. But analysts said the Bank of England’s monetary policy committee (MPC), which meets next week to set interest rates, was likely to maintain its base rate at the historic low of 0.1% over fears that the virus could flare up again.

Central bank policymakers are divided about the likely path of the recovery, with deputy governor Sir Dave Ramsden and external member Michael Saunders, a former City economist, saying it was time to begin withdrawing the £150bn stimulus injected into the economy this year as part of an £875bn quantitative easing programme.

However, a majority of the nine-strong committee have argued in separate speeches for the plan to remain in place, leaving little doubt that the central bank’s policy of low interest rates and QE will persist following next week’s meeting.

In a speech earlier this week at the London School of Economics, MPC member Jan Vlieghe said Britain’s economy was not out of the woods and the damage caused by the Covid-19 pandemic has been only partly repaired.

Writing in the Guardian, the shadow chancellor, Rachel Reeves, said: “The real-world impact of this government’s lack of grip is all too clear, not least when it comes to the economy.

“The UK had the worst economic performance in the G7 last year and isn’t bouncing back the way others are. The US has already reached pre-crisis levels of GDP per capita. The latest OECD outlook suggests Japan will be there in the autumn, and Germany early in the new year. The UK will not catch up until this time next year.”

For more than a year, the Guardian has tracked the economic fallout from the pandemic on a monthly basis, following infection rates, eight key growth indicators and the level of the FTSE 100. Faced with the deepest global recession since the Great Depression, the Covid crisis watch also monitors Britain’s performance compared with other countries.

On our dashboard, figures show the number of workers on UK company payrolls increased in June by 356,000 as employers rushed to hire staff in preparation for the relaxation of lockdown measures on 19 July.

The most popular jobs were in warehouses, transport and delivery roles and customer services.

A mismatch between the skills of people on the unemployment register and a rising number of vacancies meant the number of employees remained more than 200,000 below its level before the pandemic, data from the ONS showed.

Retail sales increased by 0.5% in June, but only after a surge in purchases of food and drink to accompany the European football championships, while house price growth fell in response to the government’s withdrawal of a stamp duty waiver on homes worth less than £500,000.