Fed signals decision on taper has moved closer amid progress on economy

Federal Reserve officials signalled they are moving closer to when they can start reducing support for the US economy, though chair Jerome Powell said there was still some way to go.

“We’re not there. And we see ourselves as having some ground to cover to get there,” he told a press conference on Wednesday after the federal open market committee (FOMC) held interest rates near zero and maintained asset purchases at $120bn a month until “substantial further progress” was made on employment and inflation.

“The economy has made progress towards these goals, and the committee will continue to assess progress in coming meetings,” the FOMC said in its policy statement. The vote was unanimous.

Stocks pared losses, the dollar lost ground and 10-year Treasury yields advanced.

“The Fed is starting the clock on tapering. It is not happening now or even in September, but expect the pace of asset buying to slow down late this year or early next,” said Neil Dutta, head of US economics at Renaissance Macro Research.

The FOMC repeated language that inflation had risen, “largely reflecting transitory factors”, and that risks to the economic outlook remain.

“The sectors most adversely affected by the pandemic have shown improvement but have not fully recovered,” the statement said.

Consumer prices are rising at the fastest pace since 2008 as the economy reopens and Americans renew spending after a year of lockdown. At the same time, the spreading Delta variant of the coronavirus has jolted investors who worry it could threaten the economic recovery.

“As long as Covid is running loose out there, as long as there is time and space for the development of new strains, no-one is finally safe,” Powell said.

Fed officials held their benchmark interest rate in a zero to 0.25% range and Powell said “we’re clearly a ways away” from lift-off. Fed forecasts published in June showed rates on hold through 2022. The quarterly projections will be updated in September.

Since last September, the Fed has set the amount of its monthly purchases of Treasuries at $80bn and mortgage-backed securities at $40bn to help the economy heal from Covid-19.

Powell said officials had discussed the mechanics of scaling back bond buying when the time came, including the pace and composition of any changes, and promised plenty of advance warning before any decision.

Some officials have said they would like to begin the taper sooner rather than later, citing financial-stability concerns including the steep rise in home prices. They’ve also argued the Fed should reduce its MBS purchases at a faster pace than Treasuries because the housing market no longer needs central bank support.

The July meeting comes a month ahead of the Kansas City Fed’s annual policy retreat in Jackson Hole, Wyoming. Fed chairs, including Powell, have sometimes used the venue to signal policy shifts. The next gathering of the FOMC is September 21-22.

Employment has made significant strides in the past few months, with the unemployment rate falling below 6% as more jobs are added and more workers rejoin the labour force. But the gains haven’t been equal for all Americans — the black unemployment rate stood at 9.2% and the Hispanic rate at 7.4% in June.

While inflation is running well above the Fed’s 2% target, officials have said that price spikes are likely temporary and are being driven by categories related to the economic reopening.

In addition, economists say the increased spread of the Delta variant, which is now the dominant strain of coronavirus in the US, may weigh on growth in the second half of this year.

Variants have surpassed inflation as the biggest risk to market stability, according to Deutsche Bank’s monthly survey of market participants.

The Fed also announced that it established two standing repurchase-agreement facilities. The two standing facilities — domestic and foreign — will serve as backstops in money markets, the central bank said in a separate statement.

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