Fed’s Powell downplays variant’s threat to economy
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By CHRISTOPHER RUGABER
AP Economics Writer
WASHINGTON (AP) — The spread of the COVID-19 delta variant is raising infections, leading some companies and governments to require vaccinations and raising concerns about the U.S. economic recovery.
But on Wednesday, Federal Reserve Chair Jerome Powell injected a note of reassurance, suggesting that the delta variant poses little threat to the economy, at least so far.
“What we’ve seen is with successive waves of COVID over the past year and some months now,“ Powell said at a news conference, “there has tended to be less in the way of economic implications from each wave. We will see whether that is the case with the delta variety, but it’s certainly not an unreasonable expectation.”
Powell spoke after the Fed ended its latest policy meeting in which it it signaled, for the first time since the pandemic began to ease, that the economy is moving closer to the “substantial further progress” it wants to see before reducing the $120 billion in Treasury and mortgage bonds it is buying each month — purchases that are intended to lower rates on longer-term consumer and business loans to spur more borrowing and spending.
A reduction in those purchases would represent the start of a gradual pullback in the Fed’s support for the economy. Only after the bond purchases had been pulled back is the Fed expected to begin considering raising its benchmark interest rates from zero, where it’s been since the pandemic erupted in March last year.
At his news conference, Powell acknowledged that the quickening spread of the highly contagious delta vari- ant was threatening some areas of the nation where vaccinations are low, and he noted that “some forecasts are for them to rise quite significantly.”
And he said that as the virus spreads, some consumers might pull back from the spending that has propelled the rapid rebound from the pandemic recession.
“Dining out, traveling, some schools might not reopen,” he said. “We may see economic effects from some of that or it might weigh on the return to the labor market. We don’t have a strong sense of how that will work out, so we’ll be monitoring it carefully.”
But Powell noted that last summer’s wave of infections had inflicted less damage to the economy that many analysts had forecast.
“We’ve kind of learned to live with it, a lot of industries have kind of improvised their way around it,” Powell added. “It seems like we’ve learned to handle this.”
The statement the Fed issued after its latest policy meeting said that ongoing vaccinations were helping to support the economy. But it dropped a sentence it had included after its previous meeting that said those vaccinations have reduced the spread of COVID-19.
The central bank is keeping its benchmark short-term rate pegged near zero, where it has remained since the pandemic tore through the economy in March 2020. The Fed will also
continue to buy $120 billion in Treasury and mortgage bonds each month — purchases that are intended to lower rates on longer-term consumer and business loans to spur more borrowing and spending.
The Fed’s latest policy statement comes as the economy is sustaining a strong recovery from the pandemic recession, with solid hiring and spending.
That improvement, and a pickup in inflation, are key reasons why Powell and other Fed policymakers are believed to be moving closer toward pulling back their economic support. Consumer prices jumped 5.4% in June from a year ago, the biggest increase in 13 years. And a separate inflation gauge the Fed prefers has risen 3.9% in the past year.
Last month’s inflation surge marked a fourth straight month of unexpectedly large price increases, heightening fears that higher costs will erode the value of recent pay raises and undermine the economic recovery. But in its statement, the Fed again expressed its belief that the increase in inflation largely reflects “transitory factors.”
Among Fed watchers and investors, there is some concern that the central bank will end up responding too late and too aggressively to high inflation by quickly jack- ing up interest rates and potentially causing another recession. Earlier this month, Republicans in Congress peppered Powell with questions about inflation.
But at his news conference, Powell said that if “we were to see inflation moving up to levels persistently that were above significantly, materially above our goal … we would use our tools to guide inflation back down” to the Fed’s target average inflation of 2% annually.
After a period of broad agreement during the pandemic crisis, the Fed’s policy- makers appear divided over how soon to bein tapering its bond purchases. Several regional Fed bank presidents support tapering soon, including James Bullard of the St. Louis Fed, Patrick Harker of the Philadelphia Fed and Robert Kaplan of the Dallas Fed.
But Powell has said that the central bank wants to see “substantial further progress” toward its goals of maximum employment and price stability before it would consider reducing the bond purchases. To make up for years of inflation remaining below 2%, the Fed wants inflation to moderately exceed its 2% average inflation target and to show signs of remaining above that level for an unspecified time.
In recent months, as consumer demand has exceeded the supply of goods and services in some industries, inflation — led by sharp price increases for things like used and new cars, hotel rooms and airline tickets — has topped 2%.
It’s not yet clear how the highly contagious and fast- spreading delta variant of the coronavirus might affect the U.S. or global economies or how the job market will fare in coming months. Hiring could accelerate in September as schools reopen, more parents are able to take jobs and expanded unemployment aid programs expire.