Fed says economic recovery remains on track despite Covid surge

US central bank leaves interest rates and bond-buying programme unchanged

Federal Reserve Chairman Jerome Powell speaks as a trader works on the trading floor at the New York Stock Exchange. Reuters

The US economic recovery remains on track despite a rise in coronavirus infections, the Federal Reserve said on Wednesday in a new policy statement that remained upbeat and flagged continuing talks about the eventual withdrawal of monetary policy support.

Fed chairman Jerome Powell said the US job market still had “some ground to cover” before it would be time to pull back from the economic support the US central bank put in place in the spring of 2020 to battle the coronavirus pandemic's economic shocks.

“I would want to see some strong job numbers” in the coming months before reducing the $120 billion in monthly bond purchases the Fed continues to make,” he told reporters.

But Mr Powell also played down, at least for now, the risk that the renewed spread of the coronavirus, through its more infectious Delta variant, will put the recovery at risk or throw the Fed off track as it plans an exit from crisis-era policies.

“It will have significant health consequences” in the areas of the country where outbreaks are intensifying, Mr Powell said. Yet in the prior waves of coronavirus infections, “there has tended to be less in the way of economic implications … It is not an unreasonable expectation” that would remain the case this time, he added.

“It seems like we have learnt to handle this” with progressively less economic disruption, Mr Powell said, even as he acknowledged a fresh outbreak might to some degree slow the return of workers to the labour market or disrupt planned school re-openings in the autumn.

The Fed also said higher inflation remained the result of “transitory factors” and was not an imminent risk to the economy or the Fed's policy plans.

The Fed's statement, issued after the end of a two-day policy meeting, reflected that confidence as the central bank continues debating how to wind down its bond purchases.

There appeared to be progress in that discussion, though no clear timetable for reducing the bond purchases was established. Mr Powell said there was “very little support” for cutting the $40bn in monthly purchases of mortgage-backed securities “earlier” than the $80bn in Treasuries, and that once the process begins, “we will taper them at the same time".

Overall, however, the Fed seemed unfazed by the spread of the Delta variant, even though new daily coronavirus infections have roughly quadrupled since the Fed's June 15-16 policy meeting.

“With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen,” the central bank said in its statement.

Though vaccinations have slowed — and Mr Powell plugged inoculation as the best chance to bring the economy durably back to normal — the Fed said it still expected vaccinations to “reduce the effect of the public health crisis on the economy".

That should translate into strong job growth, Mr Powell said, and eventually allow the Fed to move away from its crisis-era programs.

In December, the Fed said it would not change its asset-buying programme until there had been “substantial further progress” in repairing a labour market that was then 10 million jobs short of where it was before the pandemic.

That number is now below 7 million and the Fed for the first time acknowledged the economy had taken a step towards its benchmark for trimming the purchases.

“The economy has made progress, and the [Federal Open Market] Committee will continue to assess progress in coming meetings,” the Fed said in language pointing towards a possible reduction in bond purchases later this year or early in 2022.