November? December? Fed's 'taper' timeline tied to
volatile jobs data
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[September 17, 2021] By
WASHINGTON (Reuters) - The Federal Reserve,
facing a labor market that may be stalling or on the cusp of a surge, is
expected next week to open the door to reducing its monthly bond
purchases while tying any actual change to U.S. job growth in September
Fed officials, including Chair Jerome Powell, have said the U.S. central
bank's $120 billion in monthly bond purchases could be scaled back later
this year as a first step towards ending the crisis-era policies
implemented in the spring of 2020 as the coronavirus pandemic was taking
But after an unexpectedly weak gain of 235,000 jobs in August, officials
will want to keep their options open, ready to reduce bond purchases as
soon as the Nov. 2-3 policy meeting if employment growth rebounds and
COVID-19 risks recede, but able also to delay any "taper" if the virus
hinders the recovery.
"It is hard to be enthusiastic to begin reducing purchases if the pace
of (job) gains has slowed a lot," said William English, a Yale School of
Management professor and former Fed official who helped shape the
bond-buying program initiated by the central bank in response to the
2007-2009 financial crisis and recession.
"They will want more data," English said. "And if it is disappointing,
they conceivably end up waiting ... It is a tricky statement. They want
to open the door but not commit. That is the mission."
That dilemma raises the stakes for the next U.S. employment report,
which is due to be released on Oct. 8. That data is likely to show
whether the Delta variant of the coronavirus is having a deeper impact
than Fed officials anticipated earlier in the summer when they said the
economy appeared to be divorcing itself from the pandemic.
Graphic: A slow crawl to "substantial": https://graphics.reuters.com/USA-FED/JOBS/mopankjnlva/chart.png
'SUBSTANTIAL FURTHER PROGRESS'
The Fed will hold its next policy meeting on Tuesday and Wednesday, a
session that will include the release of fresh economic projections and
a new read on officials' interest rate expectations. The projections
will incorporate a volatile summer of data that included job gains of
nearly 1 million in both June and July before the dropoff in August,
unexpectedly strong inflation numbers, and a surge of COVID-19
infections and deaths that eclipsed last summer's viral wave.
As close as Fed officials seemed to be to a bond-buying taper decision
as of their late-July policy meeting, some of the subsequent data have
pushed in the other direction. New York Fed President John Williams and
Atlanta Fed President Raphael Bostic, both voting members of the central
bank's policy-setting Federal Open Market Committee (FOMC), are among
those who want more information before making a final decision.
The Fed in December said it would not change the bond purchases until
there was "substantial further progress" in reclaiming the 10 million
jobs that were missing at that point because of the pandemic.
Binding policy closely to the level of pandemic job losses made sense at
the time, with the country worried about a new slide into recession and
COVID-19 vaccines yet to be widely distributed. It now leaves
policymakers dependent on a jobs revival that has run in fits and
starts, shaped by forces as disparate as childcare availability or
opposition to mask-wearing mandates in large states like Florida and
Texas and their effect on hiring and people's ability to work.
As of August the economy had clawed back fewer than half of those 10
million missing jobs. Other relevant statistics, like the
employment-to-population ratio, are short of what policymakers like
Richmond Fed President Thomas Barkin, also a voting member of the FOMC
this year, have said they want to see before concluding that the job
market was repaired enough to begin reducing the bond purchases.
[to top of second column]
Federal Reserve Chair Jerome Powell takes his seat to testify before
a Senate Banking, Housing and Urban Affairs Committee hearing on
“The Semiannual Monetary Policy Report to the Congress” on Capitol
Hill in Washington, U.S., July 15, 2021. REUTERS/Kevin Lamarque/File
Some Fed officials, including Governor Christopher Waller, want to taper sooner
rather than later, arguing the purchases are doing little to help hiring at this
point and pose a risk if, by keeping long-term interest rates low, they fuel
housing or other asset bubbles.
With inflation also higher than expected for most of the last several months,
other officials have said the bond purchases should end by early next year.
However, a recent weakening of inflation, as expected by many other Fed
officials, may temper any sense of urgency to act faster.
Graphic: Downside 'surprises' complicate Fed's task: https://graphics.reuters.com/USA-FED/TAPER/gdvzyqwdnpw/chart.png
HOW MUCH LIKE 2013?
That kind of division over policy, in an era when economic data have veered from
frightening to ebullient, means the Fed will want to keeps its options open in
the weeks ahead, said Tim Duy, chief U.S. economist at SGH Macro Advisors and an
economics professor at the University of Oregon.
"They will do something like 2013. Clear the way to taper at any future
meeting," Duy said.
In 2013, the Fed introduced language at its September meeting that began a turn
towards eventual reduction of its last round of "quantitative easing" after the
At that meeting the Fed noted the economy showed "underlying strength" despite a
pullback in federal government spending. But because the impact of that "fiscal
retrenchment" remained uncertain, "the Committee decided to await more evidence
that progress will be sustained before adjusting the pace of its purchases."
It repeated that language at its next meeting, before actually reducing its bond
purchases in December 2013.
This time it's the Delta variant that is posing risks.
Many economists contend that attention to the taper discussion is overblown, and
that a difference of a month or two in terms of when the Fed begins or ends it
makes little difference.
But it will send a potent signal that U.S. monetary policy is closing the books
on the crisis, and will train focus on the next phase of debate over when
inflation will require the Fed to raise its benchmark overnight interest rate -
federal funds rate - from the current near-zero level.
It's a call Fed officials want to get right.
"The macro stakes around the timing are rather low," said David Wilcox, a former
Fed research director who is now a senior fellow at the Peterson Institute for
International Economics. "What is important is the inference that can be drawn
about how they are reading the inflation tea leaves. How anxious are they to
wrap up their bond-purchase program in a timely manner before they might want to
raise the (federal funds) rate? That is why this decision is of more than
(Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao)
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