US economy continues to strengthen despite Delta – Federal Reserve

The US economy continues to strengthen, albeit at a slower rate because of the Delta variant of Covid, the US Federal Reserve has said.

The central bank said the jobs market was improving and that currently high rates of inflation remained transitory.

It said it may start reducing its emergency support for the economy “soon”, but did not say when.

Half of its policymakers also projected interest rates will need to rise in 2022 from current rock-bottom levels.

The US economy has rebounded strongly this year from its pandemic lows, but there are fears Delta will derail the recovery.

The country added fewer jobs than expected in August as rising infections hit spending on travel, tourism and hospitality.

Inflation, which measures the increase in the cost of living over time, is running at 5.3% – the highest in nearly 13 years. It comes amid surging consumer demand, rising energy prices, and supply chain-related shortages.

Analysts said the bank was taking a cautious approach to pulling back support, noting no formal date was set for when it might happen.

“While the Federal Reserve has laid the groundwork for an eventual taper [of asset purchases] later this year, the Fed erred on the side of caution given that the macroeconomic landscape has deteriorated somewhat over the last few months,” said Candice Bangsund, a portfolio manager at Fiera Capital.

“Preconditions for a formal taper announcement will largely depend on economic conditions over the coming months, with an emphasis on data dependence.”

Gurpreet Gill, a macro strategist at Goldman Sachs, said ongoing supply chain disruption, the spread of Delta and higher inflation still weighed on the minds of Fed committee members.

“Given uncertainty around the health of labour market and inflationary pressures, we would not be surprised if the ‘dot plot’ changes again in the coming months as the pace of the recovery and underlying inflation dynamics become clearer.”

The Fed has two goals. It aims to keep US inflation at about 2% and to achieve maximum employment, whereby everyone who wants a job has one.

During the pandemic it has supported the economy by slashing interest rates to historic lows and pumping billions of dollars into the financial system by buying bonds and other assets.

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