Fed says economy has strengthened even with Delta variant, keeps rate near-zero

The U.S. Federal Reserve on Wednesday kept its benchmark interest rate unchanged and said the economy continues to strengthen despite concerns over the Delta variant of COVID-19.

The Open Market Committee settled with near-zero interest rates after its two-day meeting by saying, “The sectors most adversely affected by the pandemic have shown improvement but have not fully recovered.” 

“Inflation has risen, largely reflecting transitory factors. Overall financial conditions remain accommodative, in part reflecting policy measures to support the economy and the flow of credit to U.S. households and businesses.”

Although the economy has made “progress”, the Fed said it would continue buying large quantities of government debt.

With the Fed likely on hold relative to interest rates at least until late-2022, investors have been looking for clues as to when the monthly bond purchases might start to be pulled back.

The central bank currently is purchasing at least $120 billion a month in bonds, with at least $80 billion going to Treasurys and another $40 billion floor on mortgage-backed securities. Critics say the Fed’s mortgage purchases are helping stoke another housing bubble, with prices at record levels even though sales have tailed off amid tightening supply.

Some Fed officials have said they would be willing to entertain cutting back on mortgages first. Chairman Jerome Powell, though, has said several times that the mortgage purchases are having only a minimal effect on housing.

The Fed has kept its foot to the accelerator some of the fastest post-World War II growth the U.S. has ever seen on the broader economy. Second-quarter GDP numbers are out Thursday, with the Dow Jones estimate at 8.4% annualized growth for the April-to-June period. That would be the fastest pace since early 1983, not counting last year’s outsized Q3 growth as the economy reopened from the pandemic shutdown.

The Fed has faced growing inflation fears, with consumer prices running at their highest since just before the financial crisis of 2008. However, officials insist the current surge is temporary and will decrease once supply chain bottlenecks ease, demand returns to normal levels, and certain items, mainly prices of the used cars, will also get back to baseline.

Inputs from CNBC

Picture Credit: New York Times