The Federal Reserve's stimulus policies have been credited with helping the US economy recover from the Covid-19 pandemic
Washington (AFP) - Rising Covid-19 cases have slowed the US economy’s recovery, but the Federal Reserve on Wednesday said it may nonetheless “soon” be ready to begin removing stimulus it provided during the pandemic.
The economy has healed to the point that the central bank could slow the pace of its massive monthly bond purchases “if progress continues broadly as expected,” the policy setting Federal Open Market Committee (FOMC) said in a statement after concluding its two-day meeting.
When the pandemic hit in March 2020, the Fed slashed its benchmark interest rate and began buying bonds and other securities to ease lending conditions and ensure the financial system would not seize up.
Fed Chair Jerome Powell has signaled that the start of the taper process could begin before the end of the year, but an increase in the key borrowing rate would not come until later.
But in their quarterly forecasts, more members of the committee now see the first interest rate hike next year, and as many as three in 2023.
That tightening would come amid rising prices, as the bank’s median inflation forecast has risen to 4.2 percent for the year, even as they cut their 2021 growth outlook to just 5.9 percent from the seven percent projected in June.
The FOMC still attributes the recent price pressures to “transitory factors.”
But market watchers, as well as inflation hawks on the FOMC, are concerned the stimulus is helping to fuel price increases that may prove more lasting than Powell has predicted.
The first step in reining in policy will be for the Fed to reduce its monthly asset purchases currently totaling at least $80 billion in Treasury securities and $40 billion in agency mortgage‑backed securities.
Powell could provide more details on the plans at his press briefing later Wednesday.
- Strengthening economy -
The Fed is juggling competing forces as rising prices fuel inflation concerns while the economy remains about five million jobs short of where it was before the pandemic struck, forcing widespread business closures.
Despite the downshift in the pace of growth, policymakers remain relatively optimistic about the outlook.
“The sectors most adversely affected by the pandemic have improved in recent months, but the rise in Covid-19 cases has slowed their recovery,” the committee said, stressing that the bounceback is dependent on the course of the pandemic.
Mike Fratantoni, chief economist of the Mortgage Bankers Association, said the Fed’s signal of tighter policy ahead was predictable, although the shift could make loans for homes – a big economic driver – more costly.
“The job market has improved, inflation is running hot, and supply chain constraints are persisting. As a result, it is not surprising that the Fed will begin to remove accommodation,” he said in a statement.