Rapid spread of Delta in US complicates Fed’s ‘taper timeline’

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Federal Reserve updates

A jump in coronavirus cases across the US has added a further complication to the Federal Reserve’s timetable for withdrawing its support for the economy, as it weighs the potential impact of a resurgent virus on growth against a recent burst of inflation. 

The US central bank’s Federal Open Market Committee is expected to keep rates close to zero at the conclusion of its meeting on Wednesday, but policymakers have also said they will step up talks on when to start reducing or “tapering” $120bn of monthly asset purchases.

The committee will release its latest statement on Wednesday at 2pm with Jay Powell, Fed chair, holding a press conference shortly after.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said: “The Fed will acknowledge the ongoing increase in economic activity, but we expect the statement to note that the rapid spread of the Delta variant poses a threat, especially in states where vaccination rates remain low.”

He added: “At this point, the damage done to the national economy appears to be slight, and no response is required. But that would change if the rate of increase of Delta cases outside the South also becomes exponential.”

Last month’s meeting was marked by a significant upgrade to the Fed’s growth expectations for this year. But officials must now consider whether a surge of infections tied to the Delta variant will exert a drag on the economy that means they should delay the withdrawal of monetary support.

Soaring infection rates, particularly among the unvaccinated, prompted US health officials on Tuesday to perform a U-turn on its mask wearing recommendations for people who have been fully jabbed. The Centers for Disease Control and Prevention said vaccinated people should now cover their faces when indoors in areas with substantial levels of Covid-19.

The Fed has been debating whether to start “tapering” its bond purchases as a first step towards unwinding the hefty support for the economy introduced at the start of the pandemic.

High inflation data in recent months has added pressure on the US central bank to move more rapidly towards that goal and eventually begin to raise its main interest rate, which is in a target range between 0 and 0.25 per cent. 

But the new rise in coronavirus infections could lead to more caution, particularly if it leads to reduced activity among consumers and the reintroduction of restrictions designed to curb transmission.

Powell has repeatedly stressed that the economic recovery is closely tied to the trajectory of the pandemic. Before the spread of the Delta variant in the US, he and other Fed officials had become more optimistic about America’s economic prospects. Economists expect the Fed to return to a more sober assessment on Wednesday.

Since the last FOMC meeting in June, Treasury debt has rallied even though Fed officials had signalled an earlier lift-off in interest rates in their projections. Some investors have attributed the decline in US Treasury yields to concerns that US growth could be hit by the new jump in coronavirus infections.

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