US Fed says may 'soon' be time to remove stimulus

WASHINGTON (AFP) – The Federal Reserve said on Wednesday (Sept 22) that increasing Covid-19 cases have slowed the US economic recovery, but it may nonetheless be ready to “soon” begin to remove stimulus.

The economy has healed to the point that the central bank may slow the pace of its massive monthly bond purchases “if progress continues broadly as expected,” the policy setting Federal Open Market Committee (FOMC) said in a statement after concluding its two-day meeting.

When the pandemic hit in March 2020, the Fed slashed its benchmark interest rate and began buying bonds and other securities to ease lending conditions and ensure the financial system would not seize up.

Fed chairman Jerome Powell has signalled that the start of the taper process could begin before the end of the year, but an increase in the key borrowing rate would not come until later.

But in their quarterly forecasts, more members of the committee now see at least one interest rate hike next year, and as many as three in 2023.

That tightening would come amid rising prices, as the median inflation forecast is now 4.2 per cent for the year, even as their growth outlook was cut to just 5.9 per cent this year rather than the 7 per cent projected in June.

The FOMC still attributes the recent price pressures to “transitory factors.” But market watchers, as well as inflation hawks on the FOMC, are concerned the stimulus is helping to fuel price increases that may prove more lasting than Powell has predicted.

The first step will be for the Fed to reduce the monthly asset purchases currently totaling at least US$80 billion (S$108 billion) in Treasury securities and US$40 billion in agency mortgage-backed securities.

Despite the slowdown in growth, policymakers remain relatively optimistic about the outlook.

“The sectors most adversely affected by the pandemic have improved in recent months, but the rise in Covid-19 cases has slowed their recovery,” the committee said, stressing that the bounceback is dependent on the course of the pandemic.

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