U.S. economic recovery intact despite COVID-19 surge, Fed says

U.S. economic recovery intact despite COVID-19 surge, Fed says

WASHINGTON (Reuters) -The U.S. economic recovery remains 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.

People wear masks around Times Square, as cases of the infectious coronavirus Delta variant continue to rise in New York City, July 23, 2021. REUTERS/Eduardo Munoz

“With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen,” the U.S. central bank said in a statement after the conclusion of its latest two-day policy meeting.

Looking past the quadrupling of daily U.S. coronavirus infections that has occurred since the Fed last met in June, the central bank indicated it still had faith that an ongoing vaccination drive would “reduce the effect of the public health crisis on the economy” and allow a robust reopening to proceed.

Fed policymakers, in a unanimous statement, also said they were moving ahead with discussions about when to reduce the central bank’s $120 billion in monthly bond purchases, a precursor to eventually raising interest rates.

In December, the Fed said it would not change its bond-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 reducing the $80 billion in U.S. Treasury bonds and $40 billion in mortgage-backed securities it buys each month to keep long-term borrowing costs low for consumers and businesses.

“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 2021.

The Fed also said that higher inflation remained the result of “transitory factors,” meaning it was not an imminent risk.

The central bank kept its overnight benchmark interest rate near zero along with leaving the bond-buying program unchanged.

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” a change in bond purchases as soon as September, he wrote.

U.S. stocks, modestly lower before the release of the policy statement, moved toward the unchanged mark on the day. Yields on U.S. Treasuries were little changed.

Fed Chair Jerome Powell will elaborate on the latest policy statement in a news conference at 2:30 p.m. EDT (1830 GMT).

The Fed did not release any new economic projections on Wednesday, but Powell will likely be asked why he rise in daily U.S. COVID-19 infections did not appear to change the Fed’s economic outlook.

Some economists have begun to warn that new infections could upend plans to fully reopen schools in the fall, and may eventually dent consumer spending particular on travel and other close-contact services.

US economic recovery ‘making progress’, says Fed

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.

Powell says waves of covid cases have had fewer economic repercussions as uncertainty rises around delta variant

Fed leaders also offered an early signal that progress was moving in the right direction for the Fed to eventually ease its support for the markets. In the coming months, the Fed may give more direct guidance on how and when it plans to scale back $120 billion a month in asset purchases, including $80 billion in Treasury debt and $40 billion in mortgage-backed securities. Any policy changes, including eventual interest rate hikes, will depend on how the economy and labor market heal from the recession’s depths.