- ‘Progress’ on Employment Made But Much More Ground To Cover
- Cites Downside Risks From Delta Variant
- Warns Would Be ‘Mistake’ To Tighten Policy Too Soon
By Steven K. Beckner
(MaceNews) – A cautious Federal Reserve Chairman Jerome Powell Friday continued to indicate that the Fed is getting closer to scaling back asset purchases, but stopped well short of signaling when “tapering” will actually occur, as he cited heightened uncertainties.
Powell, keynoting the Fed’s annual Jackson Hole symposium, said he and his fellow monetary policymakers need to see more data, particularly on employment, but also on inflation. And he expressed wariness about the Delta variant of the Covid virus, which has prompted a growing number of state and local governments to issue mask and/or vaccination mandates.
The recovery has been “vigorous but uneven,” while “labor market conditions are improving but turbulent, and the pandemic continues to threaten not only health and life, but also economic activity,” he told the high-profile online gathering of central bankers.
While the job picture has “brightened considerably,” and while “the prospects are good for continued progress toward maximum employment,” he said there is “considerable remaining ground to reach maximum employment.”
Meanwhile, the upsurge in inflation is likely to prove “temporary,” Powell reiterated.
Drawing on monetary history, Powell said it would be a costly “mistake” to tighten credit too early, although he said the Fed must be ready to “use its tools” to counter inflation if it should prove more “persistent” than anticipated.
Powell said “it could be appropriate” to reduce bond buying before year-end, but balancing continued progress on employment with the spread of the Delta variant, he said the Fed needs to be “carefully assessing incoming data and the evolving risks” before deciding to move ahead with tapering.
“Even after our asset purchases end, our elevated holdings of longer-term securities will continue to support accommodative financial conditions,” he emphasized.
Thus, Powell reinforced, or at least did not contradict, the carefully built market perception that the Fed is headed toward tapering. But he left listeners guessing about whether it will happen late this year or early next year.
The Fed chief’s speech was live streamed after elevated Covid infections prompted Teton County, Wyoming to impose a ban on large meetings, forcing the Federal Reserve Bank of Kansas City to abandon plans to hold a three-day symposium on site in Jackson Hole and instead make it a one-day virtual event for the second straight year.
With Covid storm clouds overhanging a conference tellingly titled “Macroeconomic Policy in an Uneven Economy,” Powell peppered his speech with warnings about public health risks to the outlook, even while reiterating that the economy is making “progress” toward the Fed’s dual mandate objectives.
At its last meeting July 27-28, the Fed’s policymaking Federal Open Market Committee perpetuated a policy, initiated last December, of buying $120 billion of bond purchases per month “until substantial further progress has been made toward its maximum employment and price stability goals.” But it added, “Since then, the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings.”
After that meeting, Powell declined to signal near-term tapering. He told reporters he and his colleagues “expect that the economy will continue to move toward our standard of ‘substantial further progress,’” but said, “We’re not at substantial further progress.”
“There is “ground to cover to get there,” he continued. “We are some way away from having had substantial further progress toward our maximum employment goal.”
Minutes of the July FOMC meeting released last week showed “most participants anticipated that the economy would continue to make progress toward those goals and, provided that the economy evolved broadly as they anticipated, they judged that the standard set out in the Committee’s guidance regarding asset purchases could be reached this year.”
The minutes said “some participants suggested that it would be prudent for the Committee to prepare for starting to reduce its pace of asset purchases relatively soon.” And “a few participants expressed concerns that maintaining highly accommodative financial conditions might contribute to a further buildup in risk to the financial system that could impede the attainment of the Committee’s dual-mandate goals.”
But other Fed officials argued the FOMC “should be patient” either out of concern about Covid, labor market disruptions or the possibility of a “reemergence of significant downward pressure on inflation.”
Subsequently, a surprisingly strong July employment report prompted some Fed officials to call for an early start to tapering and others to lean more in that direction than previously. Powell, however, continued to cite shortfalls of employment from pre-Covid levels and to warn of renewed threats of contagion in Aug. 17 town hall remarks.
Now, 10 days later, Powell took a similar tack ahead of the FOMC’s Sept. 21-22 meeting, the outcome of which he may not have wanted to prejudge amid heightened uncertainty.
In a speech mixing encouragement about the economy and concern about ongoing downside risks, Powell left the timing and pace of tapering very much in doubt as he assessed progress toward the FOMC’s dual mandate objectives.
Although “the pace of the recovery has exceeded expectations,” he again complained of its “unevenness.”
“Even today, with overall gross domestic product and consumption spending more than fully recovered, services spending remains about 7% below trend,” he observed. “Total employment is now 6 million below its February 2020 level, and 5 million of that shortfall is in the still-depressed service sector,” he noted.
Regarding the quest for “maximum inclusive employment,” Powell welcomed the average 832,000 per month gains in non-farm payrolls over the past three months and the dip in the unemployment rate to 5.4%.
But that is “still much too high, and the reported rate understates the amount of labor market slack,” he said. “Long-term unemployment remains elevated, and the recovery in labor force participation has lagged well behind the rest of the labor market, as it has in past recoveries.”
On a brighter note, Powell said, “With vaccinations rising, schools reopening, and enhanced unemployment benefits ending, some factors that may be holding back job seekers are likely fading, While the Delta variant presents a near-term risk, the prospects are good for continued progress toward maximum employment.”
Regarding the FOMC’s average 2% inflation goal, Powell conceded price upsurges are “a cause for concern,” but said “that concern is tempered by a number of factors that suggest that these elevated readings are likely to prove temporary.” He also said there is no evidence of a wage-price spiral.
What’s more, Powell said inflation expectations are “broadly consistent with our 2% objective.” He said the Fed will “continue to monitor incoming inflation data.”
Powell summarized his “baseline outlook” as “continued progress toward maximum employment, with inflation returning to levels consistent with our goal of inflation averaging 2% over time.”
Against that backdrop, he presented what can only be described as a cautious or “patient” approach to firming monetary policy.
He began with a caveat about reacting to “temporary fluctuations in inflation.”
“If a central bank tightens policy in response to factors that turn out to be temporary, the main policy effects are likely to arrive after the need has passed,” he warned. “The ill-timed policy move unnecessarily slows hiring and other economic activity and pushes inflation lower than desired.”
“Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful,” he continued. “We know that extended periods of unemployment can mean lasting harm to workers and to the productive capacity of the economy.”
At times when it is hard to “distinguish transitory inflation spikes from more troublesome developments,” Powell said “there is no substitute for a careful focus on incoming data and evolving risks.”
In keeping with the FOMC’s “outcome-based” approach, Powell made clear that he wants to await more data on the economy and on the virus.
“Incoming data should provide more evidence that some of the supply–demand imbalances are improving, and more evidence of a continued moderation in inflation, particularly in goods and services prices that have been most affected by the pandemic,” he said. “We also expect to see continued strong job creation. And we will be learning more about the Delta variant’s effects.”
“For now,” Powell went on, “I believe that policy is well positioned.”
Powell said he believes “the ‘substantial further progress’ test has been met for inflation,” and he said “there has also been clear progress toward maximum employment.” But he stopped short of saying there has been “substantial further progress” in the labor market.
At the FOMC’s late July meeting, Powell said he agreed with most participants that “if the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year.” And he noted that “the intervening month has brought more progress in the form of a strong employment report for July.”
However, he said the period since the FOMC meeting has also brought “the further spread of the Delta variant.”
His bottom line was that “we will be carefully assessing incoming data and the evolving risks.”
With an obvious eye toward taper-wary bond markets, Powell stressed that “even after our asset purchases end, our elevated holdings of longer-term securities will continue to support accommodative financial conditions.” And he added, “the timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test.”
Contact this reporter: steve@macenews.com.