WASHINGTON — With the US on the upswing from the Covid-19 pandemic,
the US Federal Reserve is expected to weigh in next week on whether the economy
is healthy enough to begin withdrawing stimulus measures credited with aiding
the revival.
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But the two-day meeting of the central bank's policy-setting Federal Open
Market Committee (FOMC) beginning Tuesday ultimately may be a static event,
like many others in recent months.
Analysts do not expect the Fed to immediately begin the much-expected
slowing of its massive bond purchases, and while the committee will release
updated economic forecasts, few big changes are expected from previous
estimates released three months ago.
The FOMC "likes to prepare markets for any major change," said Joe
Brusuelas, chief economist at RSM US.
When he addresses the press after the meeting, Fed Chair Jerome Powell
"may choose the opportunity to signal that the tapering is coming, which
would likely be a November announcement with a December start," the
economist said.
The Fed took several emergency measures starting in March 2020, acting
quickly as the pandemic caused the world's largest economy to collapse.
In addition to slashing the benchmark lending
rate to zero, the
Fed began buying massive quantities of bonds and other
securities to ease lending conditions and ensure the financial system would not
seize up.
Powell has said the bank could begin drawing
back on those purchases by the end of the year, but experts expect them to take
their time.
"I think the tapering train left the station last meeting
already," said Roberto Perli, founding partner and head of global policy
research at Cornerstone Macro, who also expects the bank to begin slowing its
purchases in the last two months of the year.
Better or worse?
The FOMC will convene as the economy sends mixed signals about two of the
central bank's top priorities: employment and prices.
The United States added a disappointing 235,000 new jobs last month, though
there were better employment gains in prior months as Americans returned to
positions lost to Covid-19 business closures or found new ones.
"The Fed is never swayed by just one report, they look at the trend and
the trend is still pretty good," Perli said.
"I think they'll read the data and say we're still very much on a safe
track. I don't think the data changes anything in their mind."
The rebounding economy has spurred a sharp uptick in inflation this year,
but in August, the consumer price index grew at a slower pace than in prior
months.
Analysts will closely examine the Fed's updated economics projections,
particularly in light of the inflation spike and the Delta variant of Covid-19,
which has added to uncertainty across the economy and harmed hiring and
business operations.
"I'm expecting mostly a status quo
statement with a downgrade to the forecast with respect to slower growth, and a
slight upgrade to the forecast with respect to improved employment,"
Brusuelas predicted.
Favoring the doves
The meeting's most-scrutinized aspect will be tapering the Fed's monthly
asset purchases, currently at least $80 billion in Treasury securities and $40
billion in agency mortgage‑backed securities.
However, should the economy take a turn for the worse, "The Fed can
simply delay its announcement and the start of its tapering operations until
later this year or more likely early 2022," Brusuelas said.
"In many ways, the evolution of the data is working in favor of the
doves" who prefer lower rates and easy money policies, he added.
The Fed has said it will eventually lift the benchmark lending off zero,
though it's unclear when central bankers will consider employment sufficiently
healed after the pandemic caused more than 20 million job losses.
"If they're looking for 3.5 (percent unemployment) then they'll start
raising rates again in 230 years," economist Joel Naroff quipped.
"If they're looking for 4.5 (percent unemployment) and still declining
then I think the end of next year is reasonable."
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