Fed: Not yet sufficient economic progress to begin tapering asset purchases

The Federal Reserve on Wednesday signaled that the countdown has begun on scaling back its massive support for the U.S. economy, but a decision still appeared months away.

The central bank said last December it wouldn’t begin to wind down it massive bond-buying program until “substantial further progress had been made toward its goals of low unemployment and stable inflation. The Fed has been buying $120 billion a month in mortgages and Treasurys as part of a strategy to keep U.S. interest rates low.

“Since then, the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings,” the Fed said on Wednesday after its regular two-day meeting to evaluate the economy.

See: Text of FOMC statement for July

In a press conference after the meeting, Fed Chairman Jerome Powell said the economy and job market have continued to strengthen. Sectors hit by the Covid pandemic have improved.

Powell repeated his view that higher inflation this year largely reflects “transitory” or temporary factors tied to the reopening of the economy. A surge in pentup demand overwhelmed businesses and drove the cost of supplies and labor higher.

Read: Fed’s Powell admits inflation has risen higher than expected, but he still thinks it will all fade away

Last spring when the pandemic struck, the Fed cut its benchmark policy rate to zero. After buying trillions of dollars in assets to stabilize the financial system, since last summer the central bank has been buying $80 billion per month of Treasurys and $40 billion per month of mortgage-backed securities to keep markets stable and help spur demand.

The Fed has said it would keep buying bonds until there was “substantial” progress in reaching the Fed’s goals of “full employment” and 2% inflation.

With the economy on the mend, the Fed has started to discuss when and how to slow down the pace of these purchases. 

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Economists think the Fed got briefed by the staff at the meeting this week on different scenarios for reducing the pace of purchases and whether to trim the purchases of mortgage debt at a faster pace.

There is a lot of division at the Fed about slowing down the purchases. Some regional bank presidents have been urging their colleagues to start soon to taper the bond purchases, but the majority has resisted.

Last week Powell said that reaching the benchmark of substantial progress was still “a ways off.”

Since the Fed last met in June, economic trends are pulling the bank in different directions.

Inflation has been running hotter this year than the Fed expected. The consumer price index is up 5.4% over the past year ending in June. This argues for a quicker tapering.

On the other hand, the spread of the highly transmissible delta variant of the coronavirus is adding uncertainty to the forecast, making a waiting strategy more appealing.

The Fed also announced it has set up two standing repo facilities to allow financial firms to exchange Treasurys for cash. One facility will be for foreign and international monetary authorities and another will be for domestic firms. The new facilities are designed to support smooth market functioning during times of stress.

Stocks DJIA, -0.36% SPX, -0.02% were mixed after the Fed decision.

The yield on the 10-year Treasury note TMUBMUSD10Y, 1.231% was basically unchanged at 1.24%.


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