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MNI: Jackson Hole Too Early For Powell To Signal Taper

A patchy recovery in U.S. payrolls may force the Federal Reserve to wait before declaring it will soon reduce its bond buys.

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Federal Reserve Chairman Jerome Powell might not have enough evidence of a truly robust labor market by this summer's Jackson Hole symposium to deliver the kind of major policy signal of an imminent QE taper Wall Street has come to expect, former Fed economists told MNI.

"There's not going to be any definitive statement made there -- it's an FOMC decision after all," said Charles Steindel, a former long-time New York Fed economist and senior vice president, in an interview. "The most Powell might do at Jackson Hole is give some idea of the criteria for tapering."

Two months of weaker-than-expected job increases are a far cry from the "string" of monthly net job creation numbers near 1 million Powell said he'd like to see before declaring that there has been "substantial further progress" toward the Fed's goals.

"Next week they start the conversation—there are a lot of details to figure out, including how to communicate a taper, when to make the announcement, what to say, what conditions exactly they want to see, how far later to start the actual taper," said Roberto Perli, former Fed board economist. "That will take at least a couple of meetings if not longer."

SCARRING FEARS

The Fed's next meeting is in July and the following one is in September -- after the August Jackson Hole appearance.

"Some vague announcement that if things continue to progress in the right direction a taper could come at coming meetings is possible at Jackson Hole or the September meeting. But they sure don't seem to be in a great hurry, and the data give them cover," Perli said.

After March's payrolls rise was initially reported at 916,000 new jobs, markets built in the expectation that similar gains would follow in subsequent months, allowing the Fed to signal a taper in the summer and to actually begin reducing bond buys by late 2021 or early 2022.

Since then, not only was March's gain revised down to 785,000, employment growth slowed sharply to just 285,000 in April before up in May, but only to 559,000.

The data have raised new concerns about possible longer-term effects from the shutdowns on the labor market that could lead to the kind of scarring that worries policymakers.

That means Fed officials will need more time to distinguish signal from noise in the job market data in the same way that they are having to decipher how much of the recent spike in inflation is transitory and how much of it might prove a more permanent phenomenon.

MBS TAPER

"I think the Fed is probably willing to wait until the unemployment insurance supplement ends and schools restart to make judgments on the labor market," Joseph Gagnon, a former Fed board economist, told MNI.

Neither will happen until September, making it less likely that Powell will want to deliver any robust signals during his late August remarks at the Wyoming mountain lodge.

Danielle DiMartino Booth, a former adviser to the Dallas Fed, told MNI she believes the Fed may begin to lay the groundwork for a QE taper that's led by mortgage-backed securities given the strength, something MNI has reported Fed officials are actively considering.

"Splitting off MBS tapering from that of Treasuries could be an elegant and politically palatable compromise -- move away from mortgages but keep the Treasury QE running at full throttle until much more progress is made on the employment front," she told MNI.

St. Louis Fed President James Bullard recently told MNI in an interview he thought expectations for gangbuster employment gains in the spring were premature given lingering worries about the pandemic and issues surrounding childcare.

Richmond Fed economist Thomas Lubik told MNI last week that post-Covid structural challenges including mismatches between available jobs and workers could prolong the labor market recovery.