WASHINGTON — The Federal Reserve said Wednesday that the U.S. economy is strengthening and making progress toward the Fed’s employment and inflation goals, a small step toward tapering down its bond-buying program.
At the same time, Fed Chair Jerome Powell said the labor market still has “a ways to go” and he would like to see stronger job growth before dialing back the bond purchases.
“I’d say we have groundwork to cover in the labor market situation,” Powell said at a news conference after a two-day meeting. “I would want to see stronger job numbers and that kind of idea.”
Employers added 850,000 jobs in June but, in prior months, gains fell well short of the 1 million or so per month that many analysts expected as COVID-19 vaccinations increased and the economy reopened.
While the Fed seems to be in wait-and-see mode, some economists said its central message Wednesday leaves it on track to being tapering the bond buying early next year.
The Fed’s policymaking committee is divided, with some members calling for an earlier tapering of the bond buying program amid a recent surge in inflation. Others believe the inflation spike is temporary and, with unemployment still at 5.9%, want to wait until the Fed is closer to meeting its employment goal, recent Fed meeting minutes show.
In a post-meeting statement, the Fed repeated that it will keep buying $120 billion a month in Treasury bonds and mortgage-backed securities to hold down long-term rates until “substantial further progress has been made” toward its goals of full employment and around 2% inflation.
The statement added that the economy “has made progress toward these goals,” a sign that the Fed is moving closer toward tapering the bond purchases. The question is -- How long will that take?
“We have not reached substantial further progress yet,” Powell said. “We’re making progress. We expect further progress. We expect if things go well, we will reach that goal.”
Economists largely have blamed supply-chain bottlenecks and worker shortages for job gains that, while healthy by historical standards, have fallen short of forecasts. Many Americans are still caring for children at home while schools have been closed while others have been content to remain on generous unemployment benefits.
Both of those constraints are expected to ease in September as more schools reopen and enhanced unemployment benefits -- which already have been cut off in about half the states – run out in the rest of the country.
On the one hand, Powell said Wednesday the economy can recover the 7 million or so jobs needed to return to pre-pandemic levels quickly. At the same time, he said most unemployed people will likely not be called back to their old jobs – as happened early in the pandemic – but rather must find new ones. That could require retraining for new careers, for example.
“It may take some time,” Powell said.
Despite the Fed’s somewhat mixed messages, economist Paul Ashworth of Capital Economics expects the Fed to announce its tapering plans in August or September and begin reducing the market-friendly bond purchases early next year.
Powell appeared to downplay the recent surge in COVID-19 cases in many states because of the delta variant, possibly indicating it's unlikely the rising case numbers would prompt the Fed to further put off a scaling back the bond purchases.
“With each successive wave of COVID… there has tended to be less in the way of economic impact,” Powell said. He added, however, that could change if the surges trigger new lockdowns in the South and West.
In its statement, the Fed also reiterated that it plans to keep its benchmark rate near zero until the economy reaches full employment and inflation “moderately” tops 2% “for some time.” Economists anticipate the first rate hike in 2023.
Although the consumer price index rose 5.4% annually in June, the most in 13 years, Powell again said he believe the price leaps are concentrated in categories linked to the reopening economy -- such as airfares, hotels and rental cars – and will likely prove temporary. If that’s the case, it lessens the urgency for the Fed to hike rates.
Raising interest rates is “not something that’s on our radar screens right now,” Powell said.
This article originally appeared on USA TODAY: The Federal Reserve. Cites improving economy, sign it may cut support