Powell Stands his Ground After FOMC Statement Offers Clues on How Tapering Could Work

The United States Federal Reserve announced on Wednesday that it has decided to maintain interest rates unchanged at a 0% to 0.25% range, pointing to positive recovery signs by the economy despite the risks and concerns due to the coronavirus pandemic.

As the Federal Reserve Open Market Committee (FOMC) concluded its two-day meeting, the Fed statement said that monetary policy would likely remain accommodative until the economy moves closer towards its goals, and achieves substantial further progress.

When asked about the targeted progress, Fed Chairman Jerome Powell said in a press conference, after the statement release, that he would want to see some strong job numbers.

The central banks continue to target sustainable price stability with inflation rate at 2% and the recovery of the labor market with a return to full employment.

Sectors that were most adversely affected by the pandemic have shown improvement, are yet to fully recover, according to the Fed’s statement, which also pointed to the rise in inflation as largely reflecting transitory factors.

Powell expects inflation will remain above 2% in the coming months, before moving back towards the target.

The Fed will also maintain the current level of asset purchases at $120 billion a month, increasing its holdings of Treasury securities by $80 billion per month and mortgage-backed securities by $40 billion per month.

Powell explained that the idea of tapering it to begin reducing mortgage-backed securities purchases before Treasurys and perhaps at a faster pace along the way.

He also said he does not think asset purchases have a significant impact on the housing market, amid a surge in prices due to a limited supply.

Furthermore, the Federal Reserve announced the creation of two repurchasing agreement facilities that should add stability to money markets.

“These facilities will serve as backstops in money markets to support the effective implementation of monetary policy and smooth market functioning.”

The Board of Governors of the Federal Reserve System also voted unanimously to establish the interest rate paid on reserve balances at 0.15%, effective July 29, 2021.

Following the release of the FOMC statement, markets now see it more likely that the Fed will raise interest rates at least once before the end of next year.

Meanwhile, the Fed Chair as expected said that new waves of coronavirus (COVID-19) pandemic continue to cause uncertainty but indicated that the spread of the Delta variant might lead to less implications compared with the first wave, emphasizing the importance of vaccination.

This was further explained by saying that vaccines will help people go on with their lives and that people already learned how to live with it.