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June 18, 2021

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Fed believes US recovery on track

Source: Agencies | 00:11 UTC+8 June 18, 2021 | Print Edition

The Federal Reserve on Wednesday began closing the door on its pandemic-driven monetary policy as officials projected an accelerated timetable for interest rate increases, opened talks on how to end crisis-era bond-buying, and said the 15-month-old health emergency was no longer a core constraint on US commerce.

Signaling that broad changes in policy may happen sooner than expected, US central bank officials moved their first projected rate increases from 2024 into 2023, with 13 of 18 policymakers foreseeing a “liftoff” in borrowing costs that year and 11 seeing two quarter-percentage-point rate increases.

Seven of the officials see rates moving higher next year, opening the possibility of even more aggressive action.

Fed Chair Jerome Powell, who spoke to reporters after the release of the central bank’s latest policy statement and economic projections, said there had also been initial discussions about when to pull back on the Fed’s US$120 billion in monthly bond purchases, a conversation that would be completed in coming months as the economy continues to heal.

All told, Powell’s comments and the new Fed policy statement marked a strong vote of confidence that the US recovery is on track, with even the pandemic, an ever-present fact of life that has conditioned monetary policy since March of 2020, of diminishing concern.

The policy statement dropped longstanding language that the health crisis “continues to weigh” on the economy. Instead, Fed officials said the influence of COVID-19 vaccinations would “continue to reduce the effects” of the pandemic, a sentiment offered a day after New York state and California lifted most of their remaining pandemic-related restrictions.

“It is so great to see the reopening of the economy ... and to see people out living their lives again. Who doesn’t want to see that?” Powell said in a news briefing after the end of the two-day policy meeting, though he noted central bankers would “drag our feet” in declaring any final victory over the virus.

Still, this week’s meeting will be noted as a distinct turn away from the crisis policies the Fed has pursued since the onset of the pandemic, at times crossing into uncharted territory with its broad and open provision of credit to an economy reeling towards a potential depression.

Instead of that dour outcome, Powell said that the talks on the fate of the Fed’s asset-purchase program and the rate increases, whenever they occur, should be seen as a sign of confidence in an economic recovery that has proceeded faster than imagined.

The Fed now expects the economy to grow 7 percent this year. “Reaching the conditions for liftoff will mainly signal that the recovery is strong and no longer requires holding rates near zero,” Powell.

US stocks fell after the release of the statement and the economic projections before paring losses, with the S&P 500 index closing down about 0.5 percent. The yield on the benchmark 10-year US Treasury note rose to 1.58 percent, from 1.49 percent before the release, while the two-year US Treasury yield saw its biggest one-day move since February, climbing to its highest level in about a year at about 0.21 percent.

The new language does not mean a change in policy is imminent: The Fed on Wednesday held its benchmark short-term interest rate near zero and said it will continue for now to buy US$80 billion in Treasury securities and US$40 billion in mortgage-backed securities each month to fuel the recovery.

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