The Federal Reserve is staying the course by deciding not to veer from its ultra-loose monetary policy during its September meeting.
This week’s meeting of the Federal Open Market Committee was highly anticipated, given that economists and investors have been eagerly awaiting news on when the central bank will begin tapering its monthly purchases of $120 billion in Treasury bonds and mortgage-backed securities.
In a statement on Wednesday, the Fed acknowledged that there has been some headway made in meeting its economic goals. The central bank has made it clear it doesn’t intend to cut its asset purchasing until “substantial further progress” is made on its price stability and employment goals.
“If progress continues broadly as expected, the committee judges that a moderation in the pace of asset purchases may soon be warranted,” the Fed said, hinting at tapering coming down the pipeline.
Fed officials once again, as expected, decided to hold interest rates steady for the time being because of the economic recovery from the COVID-19 pandemic. In June, after its last meeting that included updated projections, the Fed predicted that it would begin raising rates by 2023.
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The Fed’s decision on when to raise interest rates is complicated, given the uncertainty that the U.S. economy is facing on several fronts.
If inflation continues to run stubbornly high (it has consistently outpaced Fed expectations this year), the central bank might need to raise rates to pare back price increases sooner rather than later, perhaps as early as next year — a move that could cause markets to lurch.
On the other hand, several factors are weighing on economic growth and employment. A debt-ceiling battle between Democrats and Republicans is coming more down-to-the-wire, a major Chinese property developer could go under and send shockwaves through the global economy, and the delta variant continues to cause economic obstacles. If growth ends up being worse than anticipated, the Fed may push back plans to hike rates even further.
The Fed’s forecasts for gross domestic product, inflation, and unemployment were all changed during this month’s meeting.
The central bank drove up its predictions for this year’s inflation to 4.2%, compared to its June forecast of 3.4%. However, it expects prices to fall back to 2.2% next year, which is slightly up from its previous prediction of 2.1%.
It also revised down its GDP prediction from 7% in 2021 to 5.9% and slashed its growth forecast from 3.8% to 3.3% for next year.
As for unemployment, the Fed’s June forecast for 4.8% unemployment this year was revised down to 4.5%. It kept its employment projections for the next few years the same.
During remarks after Wednesday’s announcement, Fed Chairman Jerome Powell pointed out the delta variant’s impact on the economy. He said caregiving needs for parents and fears of the coronavirus have weighed on the labor market, which is already suffering from shortages. Powell also blamed supply bottlenecks for some of the inflationary pressure but predicted prices will begin to tick down as those bottlenecks improve.
Regarding tapering of asset purchases, Powell said that while no decisions were made during this month’s meeting, generally speaking, “So long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate.”
“The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test,” Powell said.
All eyes were on the so-called “dot plot,” a chart that is released each quarter and shows where the heads of the FOMC members are at regarding interest rates. The last chart, released in June, revealed that a few participants found it appropriate to raise rates next year, but the majority predicted they should increase in 2023.
This quarter’s dot plot shows that the FOMC participants were evenly split on when interest rates should be hiked. Half said that rates should be kept at near zero through next year, while the other half indicated they wanted to see tightening. All but one participant said that interest rates should be higher in 2023 as well.
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Consumer prices increased 5.3% in the year ending in August, the Department of Labor reported this month — a slight decline from the 5.4% levels seen in June and July, but above most forecasters’ expectations from earlier in the year.
There is also some anxiety about a deceleration in employment growth after a far-less-than-stellar August jobs report. The economy added just 235,000 new jobs last month, fewer than the 750,000 that was expected. Despite the weak gains, the overall unemployment rate dropped slightly from 5.4% to 5.2%.
