Fed meeting as surging inflation, rising COVID-19 cases rattle US economic recovery

Federal Reserve policymakers will conclude their two-day meeting Wednesday as the U.S. economy and its nascent recovery from the coronavirus pandemic face down a pair of new threats: surging inflation and rising COVID-19 infections that prompted the CDC to reinstate a select mask mandate.

Economists widely expect the U.S. central bank to reaffirm its commitment to ultra-low interest rates and the $120 billion in bonds that it purchases each month amid fresh signs that the economic outlook may not be as bright as Fed officials projected last month. 

"We expect the Fed to attempt to strike a delicate balance in its remarks, highlighting the fragile economic recovery, ensuring its commitment to extraordinary monetary support as long as the economy needs it, but also highlighting increasing inflationary risks," said Cailin Birch, global economist at the Economist Intelligence Unit. "This will be difficult to do, and some financial-market volatility is possible in the coming days."

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The meeting comes as a nationwide surge in the delta variant of COVID-19 rattles investors, who are worried that rising infections could bring about new lockdown measures and a drawn-out economic recovery. The highly transmissible variant triggered a broad market sell-off last week, with the Dow Jones Industrial Average tumbling more than 700 points for its worst drop since October.

Although the U.S. was making solid progress with vaccinations – 69% of adults have received at least one shot, according to the Centers for Disease Control and Prevention – and infections began falling, cases have rebounded recently as the delta variant spreads among the unvaccinated population. 

The U.S. is averaging about 45,000 new daily cases in the last seven days, compared to the 11,000 seven-day average in June, according to the CDC.

"Growing COVID-19 cases in all 50 states will give the doves on the FOMC an extra bit of leeway in standing pat on their current pace of quantitative easing, even though the economy exited recession 15 months ago," said Danielle DiMartino Booth, CEO and chief strategist of Quill Intelligence. 

At the same time, the Fed is grappling with higher-than-expected inflation after the government reported that prices for goods and services in June jumped by the most in 13 years, fueling concerns that a rapidly rebounding economy could lead to runaway growth. The Labor Department said in its monthly report that consumer prices rose 0.9% from May and 5.4% over the past year.

The concern on Wall Street is that rising inflation could force the Fed to pump the brakes earlier than expected and start pulling back the massive monetary support it's providing for the economy. 

Still, Chairman Jerome Powell has mostly downplayed rising prices, blaming the increase on widespread shortages that have disrupted the global supply chain and pent-up demand among consumers. Though he's said inflation could turn out to be "higher and more persistent than we expect," Powell has maintained that it's likely transitory. 

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Although Powell acknowledged last month that officials had started "talking about talking about" tapering the bond purchases each month – and some FOMC members have indicated they want to begin scaling back support – the Fed head told Congress two weeks ago that the economy is still "a ways off" from where it needs to be in order for policymakers to begin unwinding some of the ultra-easy monetary policies.

"We expect Jay Powell to reiterate that the tapering discussion is underway, but that it's too soon to reveal a specific date on when the initial curtailment of asset purchases will begin," DiMartino Booth said. "Because home prices have risen at a blistering double-digit pace for 13 straight months, there is a risk of dissent on the FOMC in this week's meeting.

The Fed will issue a new policy statement at 2 p.m. ET on Wednesday, which will be followed by a press conference by Powell.