MNI:Fed Wants Taper Announcement Wiggle Room In Case Jobs Sour

Federal Reserve officials meeting next week are likely to agree internally on a November announcement for a QE tapering plan while leaving wiggle room to delay that move if the job market sours, former officials told MNI.

"An informal consensus is likely to emerge at this meeting that taper should be initiated soon," former Richmond Fed President Jeff Lacker told MNI. Officials in the closed FOMC meeting are likely opt for November to say, "if things go roughly as expected, we should taper at the next meeting."

Another stumble in the jobs report for September could spur the FOMC to delay a tapering announcement until December or early next year, over concerns that the path to achieving the employment mandate has slowed, the ex-officials said. The 235,000 jobs created in August fell well short of market expectations as the Delta variant surged.

"They are looking for further labor market progress and we only have one more jobs report before the November meeting. If that one report turned out to be a disaster it will be hard to move forward," Nathan Sheets, former international finance division director at the Fed Board and under secretary of the Treasury for international affairs, told MNI.

MORE UPBEAT PICTURE NEEDED

Chair Jay Powell said at Jackson Hole last month that inflation had met the Fed's bar for "substantial further progress" toward its 2% average inflation goal, but that improvement towards full employment was needed.

Officials have signaled that one bad month won't deter their plans, but dialing back its massive asset purchase program after two in a row could send the wrong signal, the former officials said.

"The Fed likes a more upbeat data picture to ratchet down stimulus," Lacker said.

Employers on average have created 586,000 jobs a month this year, but the labor market remains over 5 million jobs short relative to its pre-pandemic state. At the same time, job openings keep hitting record highs and jobless claims have touched new pandemic lows, bolstering the Fed's view that progress, while gradual, is ongoing.

ENOUGH POWELL SIGNALS

"Given this jobs report and the surge, they might delay things again," said Sebnem Kalemli-Ozcan, a member of the New York Fed's Economic Advisory Panel. "They could say: We said we could start tapering at the end of the year but now this surge is worse than we thought, so maybe we are going to do it at the beginning of next year. They've left themselves the flexibility to do that."

Former officials were split on whether Powell will make another incremental signal next week that a taper announcement is imminent, or stick to his Jackson Hole language that "it could be appropriate to start reducing the pace of asset purchases this year," something New York Fed President John Williams also repeated last week.

"I don't think they have to do much more signaling," Lacker said. "The chair was pretty explicit in his Jackson Hole speech."