November? December? Fed’s conical timeline linked to volatile employment data


WASHINGTON, Sept. 17 (Reuters) – The Federal Reserve, faced with a labor market that may be at a standstill or on the verge of rising, is expected to open the door next week to reducing its monthly bond purchases while by linking any real change to US employment growth in September and beyond.

Fed officials including President Jerome Powell have said the US central bank’s $ 120 billion in monthly bond purchases could be cut later this year as a first step towards ending crisis policies implemented in spring 2020 as the coronavirus pandemic took hold. socket.

But after a surprisingly small gain of 235,000 jobs in August, officials will want to keep their options open, ready to cut bond purchases as early as the November 2-3 policy meeting if job growth rebounds and risks of COVID-19 are abating, but also able to delay any “cone” if the virus hinders recovery.

“It’s hard to be enthusiastic about starting to cut back on buying if the pace of (job) gains has slowed a lot,” said William English, a professor at the Yale School of Management and former Fed official who helped to shape the bond buying program initiated by the central bank in response to the financial crisis and recession of 2007-2009.

“They will want more data,” English said. “And if it’s disappointing, they probably end up waiting… That’s a tricky statement. They want to open the door but don’t commit. That’s the mission.”

This dilemma raises the stakes for the next U.S. jobs report, due October 8. This data will likely show whether the Delta variant of the coronavirus has a deeper impact than what Fed officials predicted earlier in the summer when they said the economy appeared to be separating from the pandemic.

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The Fed will hold its next policy meeting on Tuesday and Wednesday, a session that will include the release of new economic projections and a new reading of interest rate officials’ expectations. The projections will incorporate a volatile summer of data that included job gains of nearly a million in June and July before the drop in August, surprisingly high inflation figures and a wave of infections and deaths from COVID- 19 that eclipsed the viral wave of last summer.

As close as Fed officials appeared to be on a decision to cut bond purchases at their policy meeting in late July, some of the subsequent data has pushed in the other direction. New York Fed Chairman John Williams and Atlanta Fed Chairman Raphael Bostic, both voting members of the central bank’s Federal Open Market Committee (FOMC), are among those who want more information before making a final decision.

The Fed said in December that it would not modify bond purchases until there is “further substantial progress” in reclaiming the 10 million jobs that were missing at that time due to of the pandemic.

Tying the policy tightly to the level of pandemic job losses made sense at the time, as the country worried about a further slide into recession and COVID-19 vaccines were not yet widely distributed. This now leaves policymakers dependent on a piecemeal employment recovery, shaped by forces as disparate as the availability of childcare services or opposition to childbearing mandates. masks in large states like Florida and Texas and their effect on hiring and the ability of people to work.

By August, the economy had recovered less than half of those 10 million missing jobs. Other relevant statistics, like the employment-to-population ratio, are below what policymakers like Richmond Fed Chairman Thomas Barkin, also a voting member of the FOMC this year, have said they want to see before concluding that the labor market was sufficiently repaired. start reducing bond purchases.

Some Fed officials, including Gov. Christopher Waller, are keen to cut back as soon as possible, saying the purchases don’t help hiring at this point and present a risk though, by keeping long-term interest rates low. , they fuel housing or other assets. bubbles.

With inflation also higher than expected for most of the past few months, other officials have said bond purchases are expected to end early next year. However, a recent weakening in inflation, as predicted by many other Fed officials, may dampen any sense of urgency to act faster.

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This kind of division on policy, at a time when economic data has gone from frightening to exuberant, means the Fed will want to keep its options open in the weeks to come, said Tim Duy, chief US economist at SGH Macro. Advisors and professor of economics. at the University of Oregon.

“They will do something like 2013. Clear the way for a decrease in any future meeting,” Duy said.

In 2013, the Fed introduced language at its September meeting that initiated a shift towards a possible reduction in its last round of “quantitative easing” after the financial crisis.

At that meeting, the Fed noted that the economy was showing “underlying strength” despite a decline in federal government spending. But because the impact of this “budget cut” remained uncertain, “the Committee decided to wait for more evidence that progress will be sustained before adjusting the pace of its purchases.”

He repeated this language at his next meeting, before actually reducing his bond purchases in December 2013.

This time, it’s the Delta variant that presents risks.

Many economists argue that the attention to the tapering discussion is overdone and that a difference of a month or two in terms of when the Fed starts or ends makes little difference.

But it will send a powerful signal that US monetary policy is closing the books on the crisis and will focus on the next phase of debate on when inflation will require the Fed to raise its overnight interest rate. the key date – the federal funds rate – from the current level near zero.

It’s a call that Fed officials are willing to make.

“The macro stakes around timing are pretty low,” said David Wilcox, a former Fed research director who is now a senior researcher at the Peterson Institute for International Economics. “What is important is the inference that can be drawn about how they read inflation tea leaves. How eager are they to wrap up their bond buying program in time wanted before wanting to raise the (federal funds) rate? That is why this decision is of more than fleeting interest. “

Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao

Our Standards: Thomson Reuters Trust Principles.


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