Fed Keeps Rate Unchanged, Remains Vague About QE Tapering

The Federal Reserve left the interest rate unchanged at 0.25%, in line with expectations. When it comes to its bond-buying program, the central bank said it would continue to purchase $120 billion worth of Treasuries and mortgage-backed securities every month.

The Fed observed the desired economic growth despite the surge in COVID-19 cases, which means it is one step closer to reversing its stimulus policies. However, the central bank failed to provide a concrete timeline, which prompted some analysts to argue that the central bank might move slower to tightening than many expect.

Fed Acknowledges Economic Growth

The Federal Reserve seems to be satisfied with the economic growth rate, although it stressed that much depends on whether the Delta variant is contained. It said that progress on vaccinations would likely minimize the effects of the pandemic on the economy, but risks to the outlook remain.

The Fed’s Federal Open Market Committee (FOMC) concluded after its two-day meeting that the sectors most adversely affected by COVID-19 have still managed to show improvements.

The central bank noted a sharp rise in inflation, but it said it had reflected transitory factors. The statement concludes:

Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to US households and businesses.”

https://twitter.com/federalreserve/status/1420486294908645379 

The main targets of the Fed are maximum employment across the nation and inflation at 2% over the long run. That means even if inflation keeps above 2% for the coming months, the central bank will ignore it until it consolidates near the 2% target over the longer term. Thus, the FOMC is about to keep an accommodative stance of monetary policy until these two outcomes are achieved.

Despite the economic progress, Fed chairman Jerome Powell is not impressed by the labor market. He stated during the conference:

What would substantial further progress be? I’d say we have some ground to cover on the labor market side. I think we’re some way away from having had substantial further progress toward the maximum employment goal. I would want to see some strong job numbers.”

When Will the Fed Start Tapering Bond Buying?

While it was clear that the Fed wouldn’t touch the interest rate change timeline for now, investors paid attention to the Fed’s tone regarding the tightening of its monetary policy. The truth is that the FOMC has been quite vague. While the central bank made it clear that it was closer to reducing the bond-buying program, it hasn’t provided any timeline.

Some analysts have speculated that the Fed is waiting for its Jackson Hole, Wyo. symposium, which is scheduled for next month, as a better occasion to unveil further details of when and how it would start cutting its quantitative easing (QE) program.

So far, the Fed has been buying $80 billion a month of Treasuries along with $40 billion in mortgage-backed securities. This effort was launched last year to stimulate the economy and provide liquidity during the pandemic.

Michelle Meyer, chief US economic at Bank of America, was cited by CNBC as saying:

I think [Powell] moved it out in terms of what some folks in the market were thinking. If you were setting up for an announcement at Jackson Hole, it seems his comments today made that less likely. And by saying ‘coming meetings’ plural, the Fed has now provided a good amount of options of when they would signal or announce a taper.”

Thus, many expect that a format announcement will be released in November, although Meyer didn’t rule out September. She said that, depending on what we see in the jobs report, Powell might go ahead and provide more details at the September meeting.

Meanwhile, economists haven’t reached a consensus opinion on when the Fed would start tapering back bond purchases. Some expect this to happen before the end of this year, while others point to next January or even later.

Fed’s easy policies are a big deal since they’ve been the main driver behind the stock market recovery. Any clear hint about the timeline of reducing bond-buying will affect the economy and the US dollar.

Powell Wants to Taper Bond Purchases Simultaneously

Some FOMC members previously suggested that they would want to see the central bank’s $40 billion of mortgage-backed security (MBS) purchases being reduced earlier than the $80 billion in Treasuries, given the rising prices in housing markets. However, Powell said that the Fed would likely start cutting its monthly purchases simultaneously when the time for tightening comes in a few months. He said:

There really is little support for the idea of tapering MBS earlier than Treasuries. I think we will taper them at the same time. The idea of reducing MBS purchases at a somewhat faster pace than Treasuries does have some attraction for some people – others not so much. I think it’s something that we’ll be continuing to discuss.”

USD Loses Ground After Fed Meeting

While many analysts expected the US dollar to come out as a winner following a more hawkish Fed, the greenback has declined against majors. Even though the Federal Reserve confirmed that the economic recovery was on track despite the Delta variant, it didn’t set a timeline for tapering the QE programs.

James Marple, a senior economist at TD Economics, told Reuters:

The statement dropped hints at the conversation around tapering large scale asset purchases, but did not commit to any future plans beyond continuing to assess the situation.”

The Fed’s vagueness put pressure on the dollar, with the USD index breaking below 92.000 for the first time since the end of June. Meanwhile, EUR/USD has consolidated well above 1.1800, currently trading at 1.1885, up 0.35% so far on Thursday. 

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