Fed says economy is moving in right direction as it considers scaling back markets support, but risks remain

The Fed also announced the establishment of two standing repurchase agreement facilities to serve as backstops in the markets.

Central bankers gathered this week as uncertainty rises around the delta variant and a surge in covid cases, which could threaten momentum for the economy recovery. Inflation is also rising faster than many policymakers and economists expected.

Policymakers were expected to spend their July meeting talking about ways to scale back the Fed’s ongoing support for the markets, namely $120 billion a month in asset purchases. Any policy changes, including eventual interest rate hikes, will depend on how the economy and labor market heal from the recession’s depths.

Fed leaders say they won’t consider policy changes until “substantial further progress” has been made toward maximum employment and price stability. On Wednesday, the Fed gave an inkling that the economy is moving in the right direction.

“The economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings,” the statement read.

Yet any predictable path forward seems harder to come by than ever. The delta variant is highly transmissible and spreading fast, especially among people who aren’t vaccinated.

On Tuesday, the Centers for Disease Control and Prevention walked back recent recommendations for vaccinated Americans, saying they should wear masks indoors if they live in covid hot spots, or if they live with anyone immunocompromised, or with children who aren’t old enough for the vaccines.

Many parts of the economy appear to be headed in the right direction, and it’s not yet clear if this recent wave of cases will thwart broader expectations for growth in 2021. Economists and policymakers hoped that more widespread vaccinations would help consumers unleash their pent-up savings, step back into their old routines and, in turn, bring back jobs in hard-hit industries.

Meanwhile, inflation is a particularly complicated feature of the economic recovery, and it’s posing a major test for Fed officials.

Fed leaders and the Biden administration say that inflation is temporary and that it’s isolated to parts of the economy hurt by the pandemic. They say that as supply chains clear their bottlenecks, and consumer demand eases, prices will fall back down.

Yet Republicans and some prominent economists say inflation is already at worrisome levels. Their fear is that the Fed will be too late by the time it decides to raise interest rates, and that any sudden hikes could spur another recession.

Despite so much uncertainty, Fed policymakers must gauge the economy – from inflation to the labor market – in real time. Chair Jerome H. Powell often says that controlling the virus is key to stabilizing the recovery. He warns policymakers not to get complacent.

“We don’t have another example of the last time we reopened a $20 trillion economy with lots of fiscal and monetary support,” Powell told lawmakers this month. “We are humble about what we understand.”