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Noisy jobs data could see U.S. rates path little changed next week, and officials more comfortable taking their time on taper talk.
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Federal Reserve Chair Jay Powell next week will downplay the significance of additional FOMC members penciling in an earlier rate hike even if the median projection for liftoff shifts forward to 2023, former officials told MNI.
Whether two or more out of 18 FOMC officials bump up their projected liftoff timing -- and move the median forecast -- is a close call, as labor market progress has lagged expectations since March, when the Fed last updated its forecasts, the former officials said.
"There could be some change on the margin, maybe one to two people could accelerate their liftoff timeline, but all things considered I doubt you'll see a big change," former Atlanta Fed President Dennis Lockhart said in an interview.
"Powell may say something to the effect that while indications of the recovery are quite encouraging, the gaps between current data and maximum employment are still substantial, and the committee would like to see further evidence of progress toward its goals."
Former Richmond Fed President Jeff Lacker told MNI he puts the odds of the median liftoff date floating closer to 2023 at about 40%, adding: "Powell is unlikely to join the move, and would gently try to downplay the significance in the press conference, but he would want to avoid inflaming the debate about which dot is his."
From a public communications perspective, the FOMC "wouldn't even want to show it (liftoff in 2023) in the dot plot until there's some stronger indication of consistent, persistent inflation than what we've seen in the last couple of months," said Tara Sinclair, a former St. Louis Fed economist and member of the Bureau of Labor Statistics technical advisory committee.
Relative to where the economy stood in March, "there are cross-currents" in the data, with growth and inflation above expectations and hiring a bit below, said New York Fed adviser and former Fed Board economist Jonathan Wright. "The majority of the committee will be inclined to put little store on the recent inflation numbers, so I don't think that the 11 participants who expected to still be at the zero lower bound at the end of 2023 will change their minds."
The minority of committee members more worried about inflation expectations are already eyeing liftoff in 2023 or even 2022, he added.
EXPECTATIONS REMAIN KEY
More imminently, weaker-than-expected job growth is likely to push back the timing of tapering asset purchases, sources told MNI.
"Barring some extraordinary turnaround in the next two jobs reports, I do not see any announcement of tapering being made at Jackson Hole. I would expect it to come later in the year, maybe at the December meeting," Wright said.
Despite two hot inflation reports this spring, "You haven't seen increases in nominal rates and measures of inflation compensation, and trend price measures yet," said Stephen Cecchetti, former New York Fed executive vice president and director of research at the New York Fed. "When the six-month average Trimmed Mean inflation goes up to 2.5%, I'd be worried. But it's below 2%," he said,
Still, Cecchetti conceded that he's "getting nervous," even if he's not outright worried. "There's a lot of nonlinearity in the system," he said, "I'm worried we'll wake up one morning and inflation is not going to be 2%, it's going to be 3%." Fed advisers and ex-staff have warned policymakers' downplaying of faster inflation may send price expectations lurching higher than they want and force a messy rethink of their stance
For now, policymakers are content to sit back and get comfortable with higher inflation expectations and allow the labor market time to re-attain pre-Covid levels of labor participation and unemployment, Lockhart said.
"The Powell Fed is extremely dedicated to completing the job of getting inflation expectations anchored around the target. That strikes me as taking some time to do, and therefore I think starting to hike before 2023 would probably reflect a dilution of that motivation."