The Federal Reserve held its policy rate near zero on Wednesday and said the economy continued to move forward despite concerns about the spread of the pandemic.
As expected, the Federal Reserve’s Open Market Committee closed its two-day session by keeping interest rates within a target range between zero and 0.25%.
At the same time, the committee said in a unanimously approved statement that the economy continues to “strengthen”.
Despite the optimism about the economy, Chairman Jerome Powell said the Fed is nowhere near thinking about a rate hike.
“Our approach here has been to be as transparent as possible. We haven’t made any significant progress,” he said. “See you we have a lot to do to get there.”
“Substantial further progress” in inflation and employment is the benchmark the Fed set before tightening policy, which would mean slowing and eventually stopping monthly bond purchases and eventually raising rates, and the FOMC will continue to do that Watch conditions to see how close they get to the Fed’s goals.
However, the suggestion that the Fed’s employment and inflation targets were “progressive” was taken as an indication that a change in policy, particularly with regard to monthly bond purchases, might be imminent.
“The Fed has started the tapering clock,” said PNC chief economist Gus Faucher.
Markets had been on the lookout for the Fed’s views on the spread of the Covid-19 Delta variant, but Powell and his counterparts were at least relatively confident about the threat the virus posed to the economy.
Shares lost some losses during Powell’s remarks, with the Dow negative but the S&P 500 and Nasdaq in the green.
Powell pointed to the growing threat the pandemic posed but said it was not having a major economic impact.
“What we have seen is that if there have been successive waves of Covid for the past year and a few months, the economic impact of each wave has tended to be smaller,” Powell said at his press conference after the meeting. “We’ll see if that’s the case with the Delta variety.”
“We learned to live with it,” he said later.
In a separate step, the Fed announced that it would set up two standing repo facilities, one for the domestic market and the other for foreign and international authorities. The facilities enable institutions to exchange high-quality collateral, in the case of the domestic offer primarily Treasuries, for reserves.
With the Fed likely to stand still on interest rates at least until the end of 2022, investors have been looking for clues as to when the monthly bond purchases could be pulled back.
The central bank is currently buying at least $ 120 billion a month in bonds, including at least $ 80 billion in government bonds and another $ 40 billion in mortgage-backed securities. Critics say the Fed’s mortgage purchases are helping fuel another housing bubble, with prices at record levels, although sales have declined amid dwindling supply.
Some Fed officials said they were ready to consider cutting mortgages first. However, Powell has said several times that the mortgage purchases have had a minimal impact on home construction. He said on Wednesday that he doesn’t expect the Fed to cut its mortgage purchases until the US Treasury throttles.
As for the general economy, the Fed has stepped on the accelerator despite the fastest post-WWII growth the US has ever seen. The GDP figures for the second quarter will be released on Thursday, with the Dow Jones estimate for the period from April to June showing an annualized growth of 8.4%. That would be the fastest pace since early 1983 without taking into account the oversized growth in the third quarter of last year when the economy reopened after the pandemic shutdown.
CNBC Pro’s Stock Picks and Investment Trends:
The Fed is facing growing inflation fears, with consumer prices peaking just before the 2008 financial crisis. Officials, however, insist that the current surge is temporary and will fade once supply chain bottlenecks ease, demand returns to normal levels, and sure items, especially used car prices, also return to baseline.
On the way to this week’s session, the markets discounted no chance of rate hikes this year. However, the likelihood of a 2022 hike rose from 54.4% before the session to 62% afterwards, with futures fully pricing the first hike by March 2023, according to CME and Reuters’ FedWatch tool.
Become a smarter investor with CNBC Pro.
Get stock picks, analyst calls, exclusive interviews and access to CNBC TV.
Sign up to start a free trial today.