The Federal Reserve kicked off a much-anticipated meeting this week during which policymakers are widely expected to shed light on their plans to begin dialing back support for the U.S. economy – a decision complicated by rising inflation and lackluster job growth.
For months, Fed Chairman Jerome Powell has promised the U.S. central bank will not start unwinding the ultra-easy monetary policies put in place during the coronavirus pandemic until the economy saw "substantial further progress" toward full employment and consumer prices stabilized.
During the Fed's annual Jackson Hole symposium last month – held virtually this year due to COVID-19 – Powell suggested the bar had been met on inflation and the labor market had made "clear progress," signaling the Fed would soon start reducing its $120 billion monthly purchases of Treasury and mortgage-backed securities.
"At the FOMC's recent July meeting, I was of the view, as were most participants, that if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year," Powell said. "The intervening month has brought more progress in the form of a strong employment report for July, but also the further spread of the delta variant. We will be carefully assessing incoming data and the evolving risk."
But those risks appeared to come to fruition two weeks ago, when the Labor Department reported that employers added just 235,000 jobs in August, sharply missing expectations for a gain of 728,000. It marked an abrupt drop after solid gains of 1.1 million in July and 962,000 in June.
Economists were quick to blame the job growth drag on the delta variant of the coronavirus, noting that net job growth in leisure and hospitality – which includes bars, restaurants and hotels – was zero, a sign that Americans were pulling back on spending as the virus spread nationwide.
"The surprisingly low jobs number this morning clouds the tapering outlook considerably as only 235,000 jobs were added in August, likely giving the Fed pause and pushing out their plans to announce their bond taper plans," Chris Zaccarelli, chief investment officer for Independent Advisor Alliance, said at the time.
The U.S. central bank has been grappling with how to go about altering the policies put in place in March 2020 to keep the economy afloat without triggering a market sell-off.
Even though inflation has been running well above the Fed's preferred target of 2%, most experts think the Fed will put off any announcement on tapering its asset purchases until at least November.
"The recent stock market turmoil, looming fiscal cliff and surprisingly weak August jobs report will give Federal Reserve Chair Jerome Powell convenient excuses to reiterate his intent to taper, but allow him to fall short of actually committing to a November start to tapering," said Danielle DiMartino Booth, CEO and chief strategist of Quill Intelligence.
The Fed will release a statement after its two-day meeting concludes Wednesday, which will be followed by a press conference from Powell at 2:30 p.m. ET.
The announcement will include a fresh set of economic projections, including when policymakers expect to raise interest rates from the current rock-bottom level.
Projections from the central bank's June meeting show that officials expect to raise rates twice, to about 0.6%, by late 2023, sooner than they anticipated in March. At the time, the median official did not expect to move rates until 2024. Now, 13 of the 18 Fed officials at the meeting said they expect to start lifting rates sometime in 2023, while seven of the policymakers penciled in a rate hike as early as 2022.
Economists expect minor changes to the outlook.
"Global financial risk appears to be rising, as does uncertainty around the debt ceiling and the direction of domestic fiscal policy," said Joseph Bruselas, RSM chief economist. "These conditions are not conducive to an imminent shift in policy."
In addition to the September meeting, there are two more scheduled Fed policy-setting meetings this year: Nov. 3 and Dec. 15.