The Federal Reserve kept interest rates unchanged on Wednesday and said it would continue buying large quantities of government debt, but suggested that it could slow those purchases before long if the economy continues to strengthen.
The Fed’s two key policy tools fuel demand by making money cheap to borrow and spend. Officials are actively debating when and how to slow their bond-buying program, which will be their first step toward a more normal policy setting as the economy rebounds. Officials hinted that they will continue thinking about when to begin what they refer to as tapering at upcoming policy meetings.
“Last December, the committee indicated that it would continue to increase its holdings” steadily “until substantial further progress has been made toward its maximum employment and price stability goals,” the Fed said in its post-meeting statement. “Since then, the economy has made progress toward these goals, and the committee will continue to assess progress in coming meetings.”
The central bank has been buying $120 billion in mortgage-backed securities and Treasury debt each month since last year, but economists expect the Fed to begin slowing those purchases later this year or early next. Its policy interest rate is still set to near-zero, and is not expected to increase anytime soon.
At a news conference following the Fed’s two-day meeting, Jerome H. Powell, the Fed chair, said that “the timing of any change in the pace of our asset purchases will depend on the incoming data.”
“We’re going to continue to try to provide clarity as appropriate, on timing, pace and composition,” Mr. Powell, adding that the July meeting discussion was the first deep-dive into those issues.
“I’d say we have some ground to cover on the labor market side,” Mr. Powell said, noting that he would “want to see” strong job numbers before declaring that the Fed’s “substantial further progress” standard has been achieved.
“If things go well, then we will reach that goal, and when we reach it” then “we will taper at that time.”
The central bank is trying to keep up with the evolving economy, which has shown marked improvement since the start of the year. But it wants to avoid pulling back its support too abruptly at a time when millions of jobs are missing compared to before the pandemic and as risks to the outlook persist. Those threats are only underscored by rising coronavirus cases in the United States and around the world tied to the Delta variant.
Mr. Powell conveyed a generally optimistic tone about the economy Wednesday, saying that “economic activity and employment have continued to strengthen,” even as he noted the room for improvement in the labor market. He cited virus fears, caregiving needs, and unemployment insurance benefits as factors keeping people out of work, and reasons that the labor rebound “has a ways to go.”
While he acknowledged risks from the Delta variant, he suggested that the economic pullback might not be as severe as it was at the height of the pandemic. Still, he said, “it might weigh on the return to the labor market,” noting that the Fed will be monitoring that “carefully.”
The Fed is weighing conflicting economic signals as it tries to plan — and communicate — its next steps. The United States economy is roaring back after lockdowns last year and early this year, with strong consumer spending supported by repeated government stimulus checks. Inflation is taking off as economic activity rebounds from weak 2020 levels and as surging demand for washing machines, electronics, cars and housing outstrips what producers can supply.
Consumer prices picked up by 5.4 percent in June from the prior year, the quickest pace since 2008. The Fed’s preferred inflation gauge has been slightly more muted, at 3.9 percent in May, but that, too, is well above the central bank’s 2 percent average inflation goal.
“Inflation has increased notably” Mr. Powell said at the news conference, adding that it will likely remain elevated in coming months before moderating. But the Fed chair said that as supply bottlenecks abate, “inflation is expected to drop back toward our longer-run goal.”
He noted that inflation could turn out to be higher and more persistent than Fed officials expect, but for now inflation expectations — which are important to guiding actual price gains — seem consistent with the Fed’s goal, which is to average 2 percent annual inflation over time.
Officials expect the pop in prices to calm down as the economy gets back to normal. For now, they are more worried about a different set of risks: About 6.8 million jobs are still missing compared with February 2020 levels. Workers are taking time to sort back into suitable employment, and the central bank wants to make sure the economic recovery is robust as they try to do that.
Even when the Fed begins to dial back bond-buying, interest rates are likely to remain low. Long-running economic forces have pushed them naturally lower, and the central bank is expected to keep its main policy rate — the federal funds rate — at rock-bottom, where it has been since March 2020.
Officials have previously signaled that, barring a sustained burst in inflation or financial stability risks, they would like to leave interest rates near zero until the job market has returned to full employment. Their latest economic projections, released in June, suggested that most officials do not expect the economy to meet that high bar until 2023.
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