A big question for the Fed: When will things get back on track?


The Federal Reserve is debating when and how to slow down its massive bond purchases, the first step away from its emergency stance as the economy recovers from the pandemic. As it stands, the hole the coronavirus has opened in the labor market looks big.

The reasons for withdrawing support soon are obvious. Growth backed by large government spending is coming in strong. Inflation has warmed, and while this is expected to be temporary, the rise in prices surprisingly strong.

But the job situation is another story. About 6.8 million jobs Missing employers’ payrolls compared to February 2020.

The central bank has every reason to expect the economy to continue to improve once it slows (or even stops) bond buying. Asset prices may drop slightly and long-term interest rates may rise slightly, but the Fed’s policy rate is still low, which could keep borrowing costs relatively low. Government spending continues to flow into the economy. Many consumers are brimming with savings and eagerly spending them.

The key for Fed chairman Jerome H. Powell and his colleagues is to avoid suffocating the economy by surprising investors and causing markets to spin, credit dry up and growth to pull back more abruptly than planned.

The state of the job market is a particularly good reason to proceed with caution. If the Fed inadvertently sends an overly aggressive signal to the markets, causing financial conditions to become too restrictive while millions still need new positions, there may be a long way to go to full employment.

The risk seems particularly great as a coronavirus variant has caused an increase in cases in many countries, including the United States. He underlined that the pandemic is a persistent threat, although it is still unclear how much of a barrier the Delta variant poses to growth.

For now, the Fed is careful to publish each incremental step as it discusses when and how it will begin to move away from policy support, only wanting to do so after the economy has made “significant” progress. The idea is that a constant drip of communication will prevent market-shaking surprises.

And the central bank has set an even more ambitious and patient target on interest rates. Except for some big surprises where financial risks or inflation rise dangerously, Authorities want to see The job market returns to maximum employment before raising borrowing costs.

“They want to wait,” said Kathy Bostjancic, chief US financial economist at Oxford Economics. He explained that officials weighed in on the need to keep long-term inflation private, with many jobs still missing, and hoped price pressures would be short-lived.

“They trust the T-word,” said Ms. Bostjancic. “Temporary.”

However, when this “full employment” target will be achieved is a great unknown. Many workers have retired since the start of the pandemic and it is unclear whether they will return to work, even if opportunities are plentiful.

But participation rate The proportion of those aged 25 to 54 working or actively looking for a job has fallen sharply since last year, and Fed officials are hoping that figure will pick up. Ongoing childcare issues and pandemic nervousness may be keeping prospective employees at home.

The Fed is trying to wait and see what the job market can do.

“It would be a mistake to act early,” said Mr. Powell. recently told lawmakers. “At a certain point the risks may reverse, but for me right now the risks are clear.”


Source link

Leave a Reply

Your email address will not be published. Required fields are marked *