Fed: on track to slow down support for the economy later this year

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WASHINGTON – Federal Reserve Chairman Jerome Powell signaled on Wednesday that the Fed planned to announce as early as November that it would start withdrawing the extraordinary support it triggered after the coronavirus crippled the economy there is 18 months.

Powell said if the job market keeps improving steadily, the Fed will likely start to slow the pace of its monthly bond purchases. These purchases were aimed at lowering long-term loan rates in order to encourage borrowing and spending.

“I think if the economy continues to grow overall in line with expectations,” the Fed chairman said at a press conference, “I think we can easily move forward at the next meeting.” in November.

At the same time, the Fed’s policy-making committee has indicated that it plans to start raising its benchmark rate next year – sooner than members envisioned three months ago and a sign that they fear that high inflationary pressures may persist. Powell stressed, however, that a rate hike would only take place after the Fed halted its bond purchases, a process he said would likely last until the middle of next year.

Taken together, the Fed’s plans reflect its belief that the economy has recovered sufficiently from the pandemic recession that it can soon begin to cut back on the emergency aid it provided after the virus erupted. . As the economy strengthened, inflation also accelerated to a three-decade high, increasing pressure on the Fed to pull out.

The central bank’s pullback in bond purchases and its possible rate hikes, whenever they happen, will mean some borrowers will have to pay more for mortgages, credit cards and business loans.

Equity and bond traders took the Fed’s message eagerly on Wednesday. The Dow Jones Industrial Average, which had risen more than 400 points before the Fed issued a policy statement, closed 338 points higher, a full 1%. The yield on the 10-year Treasury bill was virtually unchanged at around 1.31%.

The economy has recovered faster than many economists expected, although growth has slowed recently as COVID-19 cases have increased and labor and supply shortages have increased. hampered manufacturing, construction and some other sectors. The US economy has returned to its pre-pandemic size and the unemployment rate has fallen from 14.8% shortly after the pandemic to 5.2%.

At the same time, inflation surged as resurgent consumer spending and disruption in supply chains combined to create shortages in semiconductors, cars, furniture and electronics. Consumer prices, according to the Fed’s preferred measure, rose 3.6% in July from a year ago – the biggest such increase since 1991.

In their new quarterly projections, Fed officials plan to raise their short-term policy rate once in 2022, three times in 2023 – one more than they expected in June – and three times in 2024 This benchmark rate, which influences many lending consumers and businesses, has been close to zero since March 2020, when the pandemic erupted.

One of the factors in the Fed’s decision to possibly raise rates is that inflationary forces, as Powell noted at his press conference, appear to be lasting longer than expected. In their new forecast, Fed officials raised their projection for “core” inflation, which excludes volatile food and energy prices, to 2.3% next year from 2.1 % in June.

“The bottlenecks and shortages that we are seeing in the economy have yet to really start to ease significantly,” said Powell, acknowledging that inflationary pressures could persist “for at least a few months of more and maybe next year “.

The central bank had signaled last year that it would likely start cutting its $ 120 billion a month treasury bill and mortgage bond purchases once the economy made “further substantial progress” towards the Fed’s targets of maximum employment and average annual inflation of 2%. .

“If progress continues overall as planned, the Committee considers that a moderation in the pace of asset purchases may soon be justified,” the Fed said in the press release it issued on Wednesday after its meeting. two days.

Inflation has risen enough to meet the Fed’s test for substantial progress. And Powell said at his press conference that in his opinion Jobs also “nearly met” that test.

The Fed has not hinted at how fast it will cut buying. But it is expected to significantly reduce its purchases of treasury bills by $ 10 billion per month and $ 5 billion of mortgage-backed securities.

Powell has repeatedly expressed his belief that the current high level of inflation will subside as the economy normalizes – and partly for this reason, has said the central bank is not yet on the verge of raise rates. But changes in the Fed’s rate projections suggest it is gradually moving closer to it. In March, the 18 officials who make up its policy-making committee predicted that they would not hike rates at all until 2023. In June, the committee revised its forecast to two rate hikes in 2023. Now, he expects a rate hike as early as next year.

In their latest forecast, policymakers also say they expect the economy to grow slower this year, to 5.9%, down from its June projection of 7%. It forecasts 4.2% inflation by the end of this year, but raised its inflation projection next year to just 2.2%, from 2.1%.

Powell is also grappling with a major ethical issue surrounding the investments and transactions of some regional Fed bank chairmen. Robert Kaplan, chairman of the Federal Reserve Bank of Dallas, revealed in financial reports that he traded millions of dollars in individual stocks like Amazon, Chevron, Facebook and Google in 2020 as the Fed took extraordinary action to stimulate the economy.

Eric Rosengren, chairman of the Boston Fed, last year invested in real estate investment trusts that held mortgage-backed bonds of the type the Fed buys as part of its efforts to cut lending rates . And Powell himself owns municipal bonds, which the Fed bought last year for the first time to support this market.

A spokesperson said last week that the Fed was taking a “fresh and complete look” at its rules regarding the financial holdings of its officials. Investments were allowed under current Fed rules, and Rosengren and Kaplan have committed to sell their holdings and reinvest the proceeds in index funds and cash.

Asked about the topic at his press conference, Powell said, “We need to make changes, and we will do it accordingly. It will be a thorough and comprehensive review. We will put all the facts together. And look for ways to do it. further tighten our rules and standards. ”

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AP Economics writer Martin Crutsinger contributed to this report.


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