Fed keeps ultra-low interest rates but says US economy made 'progress' toward its goals

The Federal Reserve said Wednesday that it would maintain ultra-low interest rates and reaffirmed its commitment to other easy monetary policies, but suggested it could dial back that support in coming months if the U.S. economy continues to strengthen. 

The U.S. central bank, as widely expected, held the benchmark federal funds rate at a range between 0% and 0.25%, where it has been since March 2020, when the virus forced an unprecedented shutdown of the nation's economy. The Fed will also keep purchasing $120 billion in bonds each month, a policy known as "quantitative easing" that's designed to keep credit cheap. 

But in their post-meeting statement, policymakers said the economy had made "progress" toward their goals on employment and inflation, a sign the Fed could be inching closer to scaling back its asset purchases at upcoming meetings. 

"Last December, the committee indicated that it would continue to increase its holdings of Treasury securities…until substantial further progress has been made toward its maximum employment and price stability goals," the Fed said. "Since then, the economy has made progress toward these goals, and the committee will continue to assess progress in coming meetings."

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Wall Street widely expects the Fed to provide more insight into the timing of tapering when central bankers gather in August at their annual retreat in Jackson Hole, Wyoming.

"The Fed has lobbed the first verbal volley on tapering, noting the economy has progressed since last December when they committed to the current rate of bond purchases and that they will continue to assess the progress going forward," said Greg McBride, chief financial analyst at Bankrate. "Say something, but promise nothing."

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. 

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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.

"The path of the economy continues to depend on the course of the virus," the FOMC statement said. "Progress on vaccinations will likely continue to reduce the effects of the public health crisis on the economy, but risks to the economic outlook remain."

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. 

This is a developing story. Please check back for updates.