WASHINGTON—The Federal Reserve announced on Sept. 22 that it would keep U.S. interest rates near zero as “risks to the economic outlook remain.” The central bank revised up its inflation projections significantly for this year and said the announcement for tapering of bond purchase could come “soon.”
The central bank also downgraded its growth forecasts to reflect the economic impact of the Delta variant.
“The sectors most adversely affected by the pandemic have improved in recent months, but the rise in COVID-19 cases has slowed their recovery. Inflation is elevated, largely reflecting transitory factors,” according to the revised statement from the Federal Open Market Committee (FOMC).
At the end of a two-day meeting of the committee, Fed officials said they would hold the federal funds rate at a range of zero to 0.25 percent, in line with expectations.
Fed’s inflation projections increased materially for this year, with core inflation at 3.7 percent compared to 3.0 percent forecasted in June. The inflation forecasts beyond this year have not significantly changed.
This week’s FOMC meeting is crucial in providing important clues about the Fed’s normalization plans, including the taper signals for the central bank’s asset purchases.
The Fed’s statement said, “if progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.”
Fed officials “generally view that so long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year, is likely to be appropriate,” Chairman Jerome Powell said at a post-meeting press conference.
The central bank continues to buy at least $120 billion per month of Treasuries and mortgage-backed securities to support the economy and the flow of credit during the pandemic. Continuation of this policy is troubling, according to critics, as it stokes inflation.
While the exact timing of the Fed’s tapering notice is unclear, economists think the announcement is likely in November.
The Fed officials expect that median growth for 2021 will fall by more than a percentage point to 5.9 percent this year. They, however, revised their growth projection for 2022 up to 3.8 percent.
The unemployment rate remained mostly unchanged except for a slight upward revision to this year, from 4.5 percent to 4.8 percent.
Employers added a disappointing 235,000 jobs in August. But this unexpected slowdown is unlikely to affect Fed’s plans to reduce its asset purchases this year.
“Assuming the economy continues to improve as I anticipate, it could be appropriate to start reducing the pace of asset purchases this year,” New York Fed Bank President John Williams said during a virtual event two weeks ago.
The consumer price index (CPI) in August fell to its lowest monthly level (0.3 percent) since February, though the 12-month rate of inflation remained historically high at 5.3 percent.
Core inflation, which excludes the volatile food and energy components, rose by 0.1 percent, much lower than the 0.3 percent rate economists predicted.
In a recent op-ed, economist Nouriel Roubini, dubbed “Dr. Doom” for his accurate prediction of the 2008 U.S. mortgage crisis, warned of a “full stagflation”—persistent inflation combined with stagnant consumer demand and high unemployment.
“Over the medium term, as a variety of persistent negative supply shocks hit the global economy, we may end up with far worse than mild stagflation or overheating: a full stagflation with much lower growth and higher inflation,” Roubini wrote.
Tom Ozimek contributed to this report.