MNI STATE OF PLAY: Low Bar For Nov Fed Taper, Hikes To Follow

Federal Reserve Chair Jerome Powell said Wednesday a "decent" employment report is all that's needed before slowing asset purchases between the next meeting in November and the middle of 2022, while half of FOMC members now favor hiking rates by the end next year.

"My own view would be the 'substantial further progress' test for employment is all but met," the FOMC's bar for tapering its USD120 billion monthly QE program, Powell told reporters. "For inflation, we appear to have achieved more than significant progress -- substantial further progress."

A November start "will put us to complete our taper somewhere around the middle of next year, which seems appropriate," Powell said. The Chair also said it makes sense to finish tapering before raising rates and the Fed could accelerate the wind-up if needed, while warning that process isn't a signal about when rates will rise.

Still, the first interest-rate increase since Covid struck could soon follow, with nine officials -- two more than in June -- penciling a quarter-point rate hike by December 2022. All but one official see a liftoff from today's near-zero rates by the end of 2023, and the median FOMC member sees rates at 1.8% by the end of 2024, though views on 2024 range widely from 0.6% to 2.6%. MNI earlier reported the dot plots would likely show a hawkish tilt, including stronger support for a rate increase next year.

INFLATION GOAL MET

Many Fed officials feel the labor market has made substantial further progress since December, with the unemployment rate falling to 5.2% from 6.7%, "more than half of the distance" to estimates of the natural rate of unemployment, Powell said. Others "want to see a little more progress" but "feel it's close."

"I don't personally need to see a very strong employment report (for September), but I like to see a decent employment report," he added.

The criteria for liftoff is a "substantially more stringent test," including labor market conditions consistent with maximum employment" and inflation at 2% and on track to moderately above target, Powell said. "If inflation remains higher during the course of 2022, we may have already met that test by the time we reach lift off," he said.

The labor market bar is much trickier as the labor market conditions consistent with full employment "can change over time," Powell said.

SLOWER LABOR PROGRESS

The economy continues to experience labor shortages as evidenced by the record 11 million job openings. "While we have interesting signs that in many ways the labor market is very tight, we also have lots of slack in the labor market," Powell said.

Officials had expected workers to return to the job market by September as schools reopened and extra federal unemployment benefits expired, but Delta variant cases spiked and hiring and spending in face-to-face service industries slowed.

"It still seems that these are people who were largely working back in February of 2020. They will get back to work when it's time to do that. It just may take a longer time," Powell said.

A slow labor market recovery could put the Fed's goals of price stability and full employment at odds in the short run, he said. "We think those imbalances will sort itself out," Powell said in response to a question from MNI. "We do expect that this is sort of because of the Covid shock and reopening and all of that, and you are seeing this temporarily."

The FOMC statement maintained that elevated inflation is "largely reflecting transitory factors" while boosting estimated core PCE to 3.7% this year from 3%, and next year's to 2.3% from 2.1%. The dot plots also reflected confidence in the job recovery amid the pandemic, raising this year's unemployment rate to 4.8% from 4.5% while the next two years were unchanged at 3.8% and 3.5%.