New Covid Cases

The Federal Reserve Board (FED) said in its latest policy statement on Wednesday that despite the rise in new infections, the US economic recovery is still on track.  The way the statement was presented seemed to be optimistic as it goes out to point towards the discussions that surround the final withdrawal of monetary policy support are ongoing.

Fed Chairman Powell said that the US job market still needs to “make some progress” before it is time to withdraw economic support measures at a press conference after the announcement. The Fed introduced a series of support measures in the spring of 2020 to alleviate the economic shock which is caused by the new crown pandemic.

He told reporters that before slowing down the current monthly bond purchases of 120 billion US dollars, “I hope to see some strong employment data in the next few months.” However, Powell has played down the risk, at least for the time being, that the more contagious Delta variant virus will lead to an epidemic counterattack, which will put the recovery at risk or derail the Fed’s plan to withdraw from the crisis-era policy.

Powell said that “we seem to have learned to deal with this situation,” and economic interference is gradually decreasing, but he acknowledged that a new wave of infections might slow down workers’ return to the labor market to a certain extent or disrupt school work. Plan to resume face-to-face instruction in autumn.

The policy statement issued by Fed after the two-day policy meeting reflects this confidence, and the Fed continues to debate how to reduce its bond-purchase plan. This discussion seems to have made progress, although no clear timetable for slowing down bond purchases has been announced. Powell said that “almost no one supports” slowing down the $40 billion mortgage-backed securities (MBS) before slowing down the $80 billion monthly purchase of public debt. When the reduction process is started, “we will minimize at the same time.” 

However, overall, the Fed does not seem to be worried about the spread of the Delta variant, even though the number of new infections in the United States has tripled in a day since the Fed’s meeting in June. Although the vaccination rate has slowed, the Fed said it is still believed that the ongoing vaccination would “reduce the public health crisis effect on the economy.”  

Powell believes that vaccination is considered the best opportunity for the economy to return to normal for a long duration. Powell said that this should translate into strong employment growth and ultimately push the Fed to withdraw its crisis-era plan.

The Fed said in December that it would not adjust its bond-purchase plan until it made “substantial further progress” in repairing the job market. At that time, the job market was 10 million fewer jobs than before the outbreak. This gap has now narrowed to less than 7 million, and the Fed acknowledged for the first time that the economy had made progress towards the threshold set for slowing the pace of debt purchases.

The overnight target interest rate was kept near zero by The Fed while stagnating and keeping its bond-purchase plan unchanged. Karim Basta, the chief economist at III Capital Management, said that this “slightly optimistic” policy statement might open the door to the declaration of a slower debt purchase in September, provided that growth of employment is robust and new cases will not impact spending.