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Fed needs confirmation of job market progress in order to begin reducing bond buys.
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This month's Jackson Hole conference comes too early for Federal Reserve Chair Jerome Powell to announce or hint at the timing and pace of a reduction in the pace of central bank bond purchases, former officials told MNI.
Some investors read Powell's optimism on the economy during his last press conference as a hawkish signal. However, ex-policymakers highlighted the chair's emphasis on the need for additional job gains as a sign that a tapering announcement is not imminent.
"With regards to tapering I think what he was saying is you're not going to hear anything soon," said Dennis Lockhart, former Atlanta Fed President, in an interview. "You're certainly not going to hear anything at Jackson Hole. And they're going to deliberate for another couple of meetings in all likelihood."
The committee has shown a desire to communicate any move to reduce the monthly USD120 billion in bond buys well in advance of tapering, Lockhart said. "That suggests something like an October meeting at the earliest -- and then a December, January start to the taper. All of that is conditioned on the Delta variant not producing a real turn in the economy."
Bill Nelson, former deputy director of the Division of Monetary Affairs at the Federal Reserve Board, also told MNI it's "unlikely" Powell will signal the taper clock has started at Jackson Hole.
The Fed will instead offer some kind of guidance that a year-end taper is coming at its September meeting, Nelson said, perhaps by altering the substantial further progress phrasing.
"They could say 'if the economy develops as we expect, it will have made substantial progress toward our employment and inflation mandates relative to December by year end,'" suggested Nelson.
Some market participants had expected that recent high inflation readings might speed up the Fed's taper timeline, leading to some kind of major announcement at Jackson Hole or at the central bank's next meeting in September. That view won some support from St. Louis President Jim Bullard, who told reporters Friday he wants a taper announcement in September.
Ex-officials said the way Powell explained his own thinking on the issue at last week's press conference pointed to a lengthier timeline. The Fed chair told reporters he will give a speech at the Aug. 26-28 event at a Wyoming resort, but declined to elaborate on the topic, and in response to other questions reiterated he will be transparent and measured with QE.
KEY JOB REPORTS
"Powell made it clear that it wasn't imminent," said William Dudley, former president of the New York Fed, in an interview. "Two meetings from now would be the soonest. Probably more likely December to start in January seems like the most logical way to take all that was communicated."
As MNI has reported, much will hinge on what the next few employment reports say about the health of the labor market, with officials focused not just on net job gains but also seeking an increase in workforce participation.
Officials are keen to see what happens in September as schools are expected to reopen, even amid renewed trepidation around the surging Delta variant. The wind-up of federal jobless benefit supports and an eviction moratorium could also influence progress in the labor market.
That will take some time to filter through the economic calendar, especially if Delta has unforeseen effects on consumption.
LAGGING EMPLOYMENT-POPULATION RATIO
"You're not going to know the September jobs picture until the 1st of October. If that report is sort of a mixed bag then you're into November," before there's more clarity, said Lockhart.
The Fed's new framework has not only shifted from a forecast-based policy to an outcome-led one, it has also broadened the definition of full employment to make it stronger and more inclusive. This means a greater focus on alternate indicators, in particular the employment-to-population ratio.
Richmond Fed President Thomas Barkin recently told MNI he would need to see additional gains in that measure before advocating tapering. But as San Francisco Fed visiting scholar Yuriy Gorodnichenko noted in an interview last week, the ratio is still at levels seen during the depths of the Great Recession. (See MNI INTERVIEW: Fed to Push Off Taper, Look Through Inflation)
It's not just Powell sounding cautious on jobs since the last meeting. Fed Governor Lael Brainard said late Friday that "as of June, we had closed between one-fourth and one-third of the employment shortfall relative to last December."