MNI INTERVIEW: Fed's Barkin Favors Tying QE To Jobs Progress

The Fed should pledge to continue asset purchases until the labor market has strengthened sufficiently, a scenario much easier to envision now that safe and effective Covid vaccines are ready to be deployed, Federal Reserve Bank of Richmond President Tom Barkin told MNI Wednesday.

Asset purchases running at USD120 billion a month are providing important support to a recovery which still has a ways to go, Barkin said in an interview, suggesting that the Fed could set a labor market marker for when it would start winding down QE.

"'Until we see some sufficient strengthening in the labor market' or something along those lines -- that kind of qualitative guidance is helpful, and at some point probably will be useful for us," he said, noting that employment will lag investment during the recovery.

"My bias is to keep [asset purchases] operating until this episode is behind us," he said. "There's lots of ways to define that, but it's certainly not behind us right now."

He added that "qualitative guidance for asset purchases" would avoid the "communication challenge of multiple sets of quantitative metrics."

The FOMC has indicated it would enhance its guidance for asset purchases fairly soon, likely at the next meeting Dec. 15-16. While it is clear QE will cease some time before rates lift off zero, officials have not said what conditions would trigger the tapering.

VACCINE ADVANCE

The development of effective vaccines is a significant advance for the economic outlook, Barkin said, noting that the November FOMC meeting took place before Pfizer and others unveiled high efficacy rates for their candidates.

"It's going to be messy for the next few months as cases escalate," he said, "but there's a light at the end of the horizon." The fourth quarter "should continue on the recovery path we've been on," with high frequency credit card data signaling reasonably stable consumer spending, he said, adding that a contraction in economic output in the first quarter is "not my base case."

The second half of 2021 may be significantly rosier.

"There are scenarios with the vaccine that can be quite positive," Barkin said.

"If they're deployed widely by the end of the second quarter, it's quite conceivable to think of a summer that's more back to normal," he said.

Whether that would change the path of monetary policy, "depends on what you think happens to outcomes," Barkin said. "One of the things we did in September is we tried to send a message that monetary policy is tied to outcomes."

He saw the U.S. economy "muddling through" the next few months, with modest constraints on bars and restaurants. But, he added, "the ability for individuals and businesses to see more clearly into the future is moderating the impact of the current escalation" of Covid cases and business shutdowns.

SAVINGS AS BACKSTOP

Excess savings this year of more than a trillion dollars "will come into the economy at some point, assuming we don't shut down again," Barkin said. If consumers continue rotating their spending on services to goods, as they've done so far in the pandemic, "that would be good for U.S. manufacturing."

Employers in manufacturing and technology tell him how hard it is to find workers, and service industries executives are talking about raising wages for entry-level workers, Barkin said. That's driven by fewer workers, as women in particular take on more caregiving responsibilities, as well as a mismatch in skills and location of the types of workers who are unemployed and jobs available, he said.

"A bunch of people are frozen in place and the vaccine might elevate that," he said.

More fiscal aid would be "valuable," particularly to extend unemployment benefits and support those most in need with job retraining and matching, and workers with childcare or elderly care concerns, he said.

His outlook does not factor in a large fiscal stimulus next year, and that hasn't changed with the new administration and Congress, he said.

"A lot of the uncertainties that have plagued us over the last four to five months are coming into much clearer focus to me, and that starts with the virus."