Economic Flash

Saying “The Economy Has Made Progress”, Fed Opens Door to Tapering

by Craig Dismuke, Dudley Carter

The FOMC voted unanimously to keep policy unchanged at its July 27-28 meeting, keeping its overnight target rate range between 0.00-0.25% and continuing asset purchases at a pace of $120 billion per month. However, they also acknowledged that progress has been made in achieving their dual mandate, opening the door to changes in policy at upcoming meetings.

The Official Statement contained three material changes.  First, the assessment of the areas of the economy hardest hit by the virus was improved.  The characterization that those areas “remain weak but have shown improvement” was upgraded to “have shown improvement but have not yet fully recovered.”  Second, the Statement was tweaked to note that the economy is now less dependent on the course of the virus.  Third, and most relevant, they updated the economy’s progress on achieving the threshold of making “substantial further progress” before slowing the pace of asset purchases. Included in the Statement was the acknowledgement that “the economy has made progress toward these goals and the Committee will continue to assess progress in coming months.”

This acknowledgement opens the door to changes in policy at upcoming meetings.  The wording does not imply that tapering is imminent, but it surely puts the option on the table as the data evolve.

Notably absent in the changes to the Statement were any changes to the characterization of inflation.  With inflation already having risen higher than many Fed officials expected, the Statement continued to note that the increase is believed to “largely reflect transitory factors.”

The Fed also implemented a new standing repo facility for domestic and foreign users with a cap of $500 billion.  The New York Fed’s implementation note indicated that the facility is designed to “serve as backstops in money markets to support the effective implementation of monetary policy and smooth market functioning.”

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FOMC Official Statement

July 27-28

The Federal Reserve is committed to using its full range of tools to support the U.S. economy in this challenging time, thereby promoting its maximum employment and price stability goals.

With progress on vaccinations and strong policy support, indicators of economic activity and employment have continued to strengthen. The sectors most adversely affected by the pandemic have shown improvement but have not fully recovered. Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.

The path of the economy continues to depend on the course of the virus. Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. With inflation having run persistently below this longer-run goal, the Committee will aim to achieve inflation moderately above 2 percent for some time so that inflation averages 2 percent over time and longer‑term inflation expectations remain well anchored at 2 percent. The Committee expects to maintain an accommodative stance of monetary policy until these outcomes are achieved. The Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and expects it will be appropriate to maintain this target range until labor market conditions have reached levels consistent with the Committee’s assessments of maximum employment and inflation has risen to 2 percent and is on track to moderately exceed 2 percent for some time. Last December, the Committee indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. Since then, the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings. These asset purchases help foster smooth market functioning and accommodative financial conditions, thereby supporting the flow of credit to households and businesses.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee’s goals. The Committee’s assessments will take into account a wide range of information, including readings on public health, labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Raphael W. Bostic; Michelle W. Bowman; Lael Brainard; Richard H. Clarida; Mary C. Daly; Charles L. Evans; Randal K. Quarles; and Christopher J. Waller.

Implementation Note issued July 28, 2021