As the economy makes “progress,” the Fed hints closer to a reduction decision

Federal Reserve Update

The Fed hinted that it was about to withdraw support for the US economic recovery by reducing central bank asset purchases, and announced that it had made “progress” in achieving its goals.

At the end of the two-day meeting on Wednesday, the Federal Open Market Committee kept the main interest rate close to zero and said it would continue to buy $120 billion in debt every month until the recovery made “substantial further progress.” Last December.

But the Fed has provided new guidance on the “scaling down” of its bond purchase program launched at the height of the pandemic last year, saying that the conditions for this move will be evaluated later this year.

“since [December], The economy has made progress towards these goals [of price stability and full employment], The committee will continue to evaluate the progress of future meetings,” the Federal Open Market Committee said.

At the time of the FOMC meeting, economic signals were conflicting. Since U.S. central bank officials last met in June, inflation data has been higher than expected, and the spread of the Delta variable in the United States has renewed concerns about the labor market and economic growth.

“With the progress of vaccination and strong policy support, economic activity and employment indicators continue to increase. The industries most adversely affected by the pandemic have improved, but have not yet fully recovered. Rising inflation mainly reflects temporary factors. “The Federal Open Market Committee said.

The Fed plans to increase discussions on reducing the scale of asset purchases at this meeting. Fed Chairman Jay Powell needs to reach a consensus on the timing, conditions, and details of slowing down actions to support the recovery, possibly later this year or early 2022. Powell has taken a cautious approach to reduce the Fed’s monetary policy stimulus so far, although more hawkish officials have pushed for faster action.

Last month’s FOMC meeting marked a significant upgrade of Fed officials’ economic forecasts, including forecasts of earlier interest rate hikes. But the spread of the Delta variable in recent weeks may cause the Fed to require greater patience, especially if it leads to a reduction in consumer activity and reintroduce restrictions aimed at curbing the spread.

The soaring infection rate, especially the unvaccinated infection rate, prompted US health officials to take a big turn on Tuesday about their mask recommendations for people who have been completely stabbed. The US Centers for Disease Control and Prevention stated that vaccinated people should now cover their faces in indoor areas with high Covid-19 levels.

The recent volatility in US government bond prices partly reflects concerns about the Delta variable and the potential blow to growth. Although Fed officials hinted at an early interest rate hike in their forecasts last month, US Treasuries have risen sharply in recent weeks. The yield on the benchmark 10-year Treasury bond declined in turn, hovering at around 1.26% on Wednesday.

The Fed also announced the creation of two permanent tools that allow eligible domestic and foreign market participants to exchange U.S. Treasuries and other short-term securities for cash — these tools used to be endorsement This week, a group of heavyweight former policymakers used it as a way to ensure sufficient liquidity in the national debt, especially in times of stress.

The maximum operation scale of the so-called permanent repurchase facility is set at 500 billion U.S. dollars, and the minimum bid rate is 0.25%. The list of counterparties will be expanded over time, and currently includes primary dealers who underwrite the sales of government bonds.

“These tools will serve as the backing of the currency market to support the effective implementation of monetary policy and the smooth operation of the market,” the Federal Reserve said in a statement.

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