A flash in the pan or a bad moon rising?Fed holds meeting amid COVID-19 surge and tight inflation Reuters

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© Reuters. File photo: The Federal Reserve Building was taken on August 22, 2018 in Washington, DC, USA. REUTERS/Chris Wattie/File Photo

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Howard Schneider

WASHINGTON (Reuters)-The Federal Reserve will conclude its latest policy meeting on Wednesday, weighing the risks of a US COVID-19 comeback and a possible slowdown in economic recovery, as well as the evolving threat of inflation that has been its main focus.

Fed officials are expected to continue to debate when to get the economy out of the measures taken to deal with the aftershocks of the pandemic more than a year ago, especially when to reduce the US$120 billion in Treasury bonds and mortgage support to the US Central Bank. Buy securities to drive down long-term interest rates.

However, the discussion that began in earnest when COVID-19 cases in the United States were affected by vaccination six weeks ago was complicated by the rapid spread of the more contagious Delta variant of the virus and the renewal of crisis conditions in certain regions. Hospitals and in some cities have restored the requirement to wear masks.

Although it is mainly concentrated in the 40% of the U.S. adult population who has not yet been vaccinated, the current outbreak still exposes the Federal Reserve to new tensions regarding whether planning to combat inflation should be the top issue in the case of a health crisis that may not be contained. recover.

Picture: Infection is on the rise again: https://graphics.reuters.com/USA-ECONOMY/CORONAVIRUS/akpezggydvr/chart.png

“Sadly, (Fed Chair Jerome) Powell will have to admit the downside risks that are starting to emerge,” Grant Thornton chief economist Diane Swonk said at the Fed for two sessions this week. Wrote days before the policy meeting. “The question mark is how the spread of Delta variants affects returning to work, and whether it will inhibit some service demand”, these demands have begun to lead the economic recovery and pull millions of marginalized people back to work.

Compared with before the pandemic broke out in early 2020, the U.S. economy still lacks 6.8 million jobs. Powell said that before any efforts by the Fed to encourage job growth are changed, the country is “still a distance” from the progress he hopes to see. Powell will hold a press conference after the release of the Fed’s latest policy statement at 2 pm Eastern Time (1800 GMT).

Chart: “Substantial further progress” of the Fed? : Https://graphics.reuters.com/USA-ECONOMY/FEDPROGRESS/yzdvxmmmdpx/chart.png

Infection and inflation

Sixteen months after entering the national emergency, the Fed is still in a comprehensive response to the crisis, continuing to maintain its benchmark overnight interest rate at a level close to zero, and buying bonds at a rate that some policymakers have begun to publicly question how aggressive they are. They pointed out that inflation is taking off and house prices are reaching record highs, partly because of relatively low mortgage interest rates.

Dallas Fed Chairman Robert Kaplan said after the June 15-16 policy meeting that in order to avoid bigger problems in the future, the Fed should “withdraw as soon as possible”. St. Louis Fed President James Brad also expressed a similar view-only to see the second largest city in Missouri re-implement the regulations on wearing masks indoors amid the rapid outbreak of the coronavirus in the state.

Nationwide, since the Fed’s June meeting, the number of daily infections has increased by approximately four times, making the seemingly simple process—from fighting a recession to managing rising prices and other risks of a strong recovery—to become A more nuanced debate about how to continue prepares for the end of the pandemic, while also acknowledging its persistence.

According to a new Reuters survey, 160 of 202 economists (about 80%) said that the spread of the new coronavirus variant is the biggest risk to economic recovery.

The latest surge in cases has yet to be clearly shown in the economic data. Consumer confidence remains high, and people are still boarding flights and going to restaurants.

Picture: American air travel is resuming: https://graphics.reuters.com/USA-ECONOMY/TRAVEL/zgpomwnnapd/chart.png

Nonetheless, analysts at Bank of America (NYSE:) recently elicited a cautionary tale from Michigan, where a wave of infections in February appeared to have weakened hiring and consumer spending.

These analysts wrote: “So far, we have seen little evidence that the Delta variable significantly affects economic activity or service spending.” But “we have good reasons to worry about the current outbreak and what it means.”

The conversation continues

Among these risks, there is no guarantee that inflation will recede within the Fed’s comfort zone schedule-which may put the central government in between slowing growth and rising prices, which is the worst of the two worlds.

The new Fed framework ostensibly allows inflation to be higher than the central bank’s official 2% target, thereby providing the economy with more room for job creation.

However, this approach was designed after a decade of low inflation, and it is expected that the main challenge will be to increase the slow pace of price increases. However, as of May, as the world economy is plagued by supply chain issues and other challenges related to economic reopening, the Fed’s preferred inflation indicator is almost twice the target interest rate.

If this trend continues, “they will have to say at some point,’we really have to cancel accommodation’… and they can’t wait for maximum employment” and then raise interest rates, as their current policy promises, Bill English Said, Yale University School of Management professor and former head of the Federal Reserve Monetary Affairs Department.

For this reason alone, it is expected that the Fed will continue to plan how to reduce its bond purchase program. The central bank hopes to end monthly purchases before considering raising interest rates, and the process of gradually reducing purchases may take a year to complete-if inflation persists and interest rate hikes become more urgent, this will be a long process.

The officials also promised to notify them in advance before actually making any changes, thereby adding a few months to the timetable.

So far, officials have not ruled out any options. Market analysts said they expect the Fed to clarify its plan to end bond purchases in the fall and may begin to reduce purchases early next year.

This assumes that the United States continues to recruit, travel, dining out and other close social activities will resume.

The International Monetary Fund updated its World Economic Outlook on Tuesday, raising its forecast for US economic growth in 2021 to 7%. But in a related blog, IMF chief economist Gita Gopinath warned central banks not to be distracted by “premature tightening policies” due to rising inflation, which is expected to subside on its own.

She wrote: “Until the pandemic is repelled globally, recovery will not be guaranteed.”



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