U.S. Fed sets stage for announcement of tapering asset purchases amid uncertainty over Delta variant, debt ceiling

The U.S. Federal Reserve on Wednesday set the stage for its formal announcement of a plan for tapering asset purchases as soon as November amid the uncertainty caused by the Delta variant and the nation's debt ceiling.

The U.S. central bank has pledged to continue its asset purchase program at least at the current pace of 120 billion U.S. dollars per month until "substantial further progress" is made toward its maximum employment and price stability goals since last December.

"Since then, the economy has made progress toward these goals. If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted," the Federal Open Market Committee (FOMC), the Fed's policy-making committee, said Wednesday in a statement after a two-day meeting.

"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," said the statement.

While the sectors most adversely affected by the pandemic have improved in recent months, the Delta variant has led to significant increases in COVID-19 cases, resulting in significant hardship and loss and slowing the economic recovery, Fed Chair Jerome Powell said at a virtual press conference on Wednesday afternoon.

Partly reflecting the effects of the virus and supply constraints, Fed officials revised down their forecasts for U.S. economic growth this year compared with three months ago, he said.

The U.S. economy is expected to expand at 5.9 percent this year, lower than 7 percent estimated in June, according to the median forecast of the Fed's latest summary of economic projections released on Wednesday.

The median estimate of inflation at the end of this year, measured by annual growth in the personal consumption expenditures (PCE) index, rose to 4.2 percent from 3.4 percent in June, well above the central bank's target of 2 percent.

The unemployment rate has fallen to 5.2 percent in August from 6.7 percent in December last year. The median projection for the unemployment rate at the end of this year stood at 4.8 percent, slightly higher than the June estimate.

Noting that the substantial further progress test for employment is "all but met," Powell said tapering could come as soon as the next meeting in November.

"The Committee will consider that test and look at the broader environment at that time and make a decision whether to taper," he said.

"While no decisions were made, participants 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," added the Fed chair.

"This sets up the FOMC to potentially announce the commencement of tapering at the next FOMC meeting on November 3," Jay H. Bryson, chief economist at Wells Fargo Securities, said Wednesday in an analysis.

"In our view, that decision will ultimately depend on the flow of data, and the course of the pandemic, over the next few weeks," Bryson said, adding the September labor market report, which is scheduled for release on Oct. 8, will be crucial to watch.

"If payrolls disappoint again, then the FOMC may decide to take a pass at the November meeting and wait until its last meeting of the year on December 15 to see if the data improve by then," he said.

Diane Swonk, chief economist at major accounting firm Grant Thornton, agreed that a major shortfall in employment for September, or a failure to lift the debt ceiling in Congress, could prevent the Fed from tapering in November.

"Powell stressed that the debt ceiling must be raised, given the risks to the overall economy of a major default in U.S. debt," Swonk said in a blog, adding Powell worked aggressively with the Bipartisan Policy Center in 2011 to avert a default back then.

"It's just very important that the debt ceiling be raised in a timely fashion so the United States can pay its bills when they come due," Powell told reporters on Wednesday, noting the central bank can't protect the U.S. economy and financial markets from severe damage if the United States defaults on its debt.

Powell's remarks came after the U.S. House of Representatives on Tuesday night passed a bill that would prevent a federal government shutdown and suspend the debt limit on government borrowing into December 2022.

The bill now heads to the Senate, where the Senate Republicans have vowed to block it. Forty-six Republican senators last month signed a letter pledging not to help Democrats raise the debt ceiling, raising the risk of U.S. defaulting on its obligations in the fall.

U.S. Treasury Secretary Janet Yellen warned on Sunday that U.S. economic recovery would reverse into recession if Congress fails to swiftly raise the debt limit.

Powell also reaffirmed that the Fed's decision on when to taper will not affect when it begins to hike interest rates as the central bank currently kept its benchmark interest rate unchanged at the record-low level of near zero.

Fed officials were evenly split on the likelihood of an interest rate increase in 2022, with nine predicting a move by the end of next year and the remaining nine holding off until 2023, according to the Fed's new projections released on Wednesday.

"The fact that all 18 members do not see the Fed hiking rates this year and that nine members think that rate hikes may not be appropriate through the end of next year indicates that the Fed will not be tightening policy anytime soon," Bryson said, expecting the Fed to remain on hold through the end of next year.

"We will continue to make the case that Powell is more dovish than most of his committee members. Should he be reappointed as chairman, then we would anticipate that it will be 2023 before the first rate hike," echoed Joseph Brusuelas, chief economist at accounting and consulting firm RSM US LLP.