Work in Progress: Fed Stands Pat

As expected, in a unanimous vote, the Federal Open Market Committee (FOMC) of the Federal Reserve (Fed) kept the fed funds rate unchanged in its range of 0-0.25%. The accompanying FOMC statement had a few changes relative to June; including a reference to economic activity and employment which “have continued to strengthen … but not fully recovered.” The statement was also more explicit with regard to the Fed’s goals of maximum employment and price stability: “Since then, the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings.” Notably absent in that new sentence was “substantial” in front of “progress.”

The statement repeated language that inflation had run persistently below the Fed’s long-run 2% goal. The third consecutive “hot” inflation report came between the June and July meetings; and the repeat of the inflation language suggests there were not many new tidbits in the Committee’s inflation conversation. Notably absent from the statement was any reference to COVID-19’s Delta variant. However, the statement did drop a line from June’s statement about vaccines having “reduced the spread of COVID-19 in the United States”—perhaps a subtle nod to concerns about Delta.

The FOMC also pledged to continue asset purchases at $120 billion per month until the aforementioned “further progress” has been made. Since September of 2020, the Fed has been buying $80 billion of Treasuries and $40 billion of mortgage-backed securities per month. Fed Chair Jerome Powell has said the Fed would begin talking about when and how to taper its bond purchases at this week’s meeting; promising ample advance notice relative to the tapering start point. That said there is building frustration among Fed watchers/investors that there has been nothing quantified by the Fed as to how they are defining “substantial further progress.” In fact, the very first question asked at the post-FOMC press conference was specifically about how it’s being defined (more on the press conference below).

In a separate statement, the Fed also announced that it established two standing repurchase (repo) agreement facilities and that “these facilities will serve as backstops in money markets to support the effective implementation of monetary policy and smooth market functioning.” The foreign repo facility essentially makes permanent a temporary program set up by the Fed during the most stressful stage of the pandemic—when foreign central banks were selling Treasuries for dollar cash. That repo facility allows global central banks to access dollar liquidity quickly from the Fed without having to resort to selling securities.