Fed says US economy is progressing as central bank ponders withdrawal

The Federal Reserve on Wednesday kept interest at almost zero, but hinted that the economic recovery in the US is getting closer to a point where it may not need as much monetary support.

The Federal Open Market Committee kept its benchmark interest rate in the range of 0% to 0.25% on Wednesday, but released an update on its December 2020 commitment to buy at least $120 billion a month in US Treasury bonds and mortgage-backed securities of the United States. government agencies until the recovery appeared to be making “significant further progress”.

“Since then, the economy has made progress toward these goals, and the committee will continue to review progress in upcoming meetings,” the FOMC statement said. The decision was unanimous.

The policy-making Federal Open Market Committee noted that inflation still appears to be the result of “temporary factors,” identical to the wording of its last policy decision six weeks ago.

A wide variety of inflation data since the June meeting six weeks ago has pointed to further price pressures. The consumer price index, a key measure of inflation, showed prices rising 5.4% year-on-year in June, the fastest pace since August 2008.

Rising prices have sparked some chatter within the Fed about the possibility of more sustained inflation. But some of the high inflation rates of recent months are the result of price pressures from microchip shortages (ie in car and truck prices) and the ways inflation itself is measured (called “base effects”).

Fed Chair Jerome Powell told Congress two weeks ago that the jury is still out on how persistent inflation will be, arguing that the next six months will paint a clearer picture.

“It will depend on the path of the economy, it will really happen,” he told the House Financial Services Committee on July 14.

Permanent repo facility

The Fed also made an announcement about its intention to “permanent repo facilities” to improve the sanitation of the financial system.

In the depths of the pandemic, the US Treasury bond market (largely seen as the most liquid market in the world) dried up amid a global push for cash. In the absence of other counterparties, the Fed itself offered liquidity to certain primary dealers on an ad hoc basis. But non-banks that didn’t have access to the Fed were locked out.

The Fed said its permanent repo facility would help improve market making in future periods of stress by offering two facilities, one for domestic counterparties and another for those abroad.

The domestic facility will have a maximum size of operation of $500 billion (with minimum bid rates of 25 basis points) and the facility of Foreign and International Monetary Authorities (or FIMA) will be set at 25 basis points with a limit per counterparty of $60 billion.

“These facilities will serve as money market backstops to support effective monetary policy execution and smooth market functioning,” the Fed said in a statement.

A report from a team of former US Treasury secretaries and Fed officials on Wednesday morning recommended that the Fed has set up a permanent repo facility to remedy a weakness in the “global critical market” for US government debt.

Brian Cheung is a reporter on the Fed, economics and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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