Fed Chair Powell: Closer to Reaching Employment Goal for Tapering, but Tapering Does Not Imply Rate Hikes
by Craig Dismuke, Dudley Carter
Fed Chair Powell’s Jackson Hole speech noted that the pace of economic recovery has “exceeded expectations,” the “outlook for the labor market has brightened considerably in recent months,” and the concerningly high level of inflation is “likely to prove temporary.” As it relates to the monetary policy path going forward, Powell continued to say that it appears appropriate to begin tapering asset purchases before the end of the year.
Closer to Reaching Employment Goal for Tapering: Powell noted that the “substantial further progress” threshold for tapering has been met on the inflation mandate but that the assessment is less clear on the employment mandate. However, he cited the recent strength in payroll growth, record-high job openings and job quits, and employers’ difficulty in filling job openings. Given this assessment, it appears he will support tapering if there is further evidence of strong job growth raising the importance of the August payroll report (released September 3).
But Tapering Does Not Imply Rate Hikes: Powell’s speech also differentiated the progress necessary to warrant tapering from the threshold necessary for raising the Fed’s target interest rates. He stated, “The timing and pace of the coming reduction in asset purchases will not be intended to carry a direct signal regarding the timing of interest rate liftoff, for which we have articulated a different and substantially more stringent test.” Specifically related to reaching the employment threshold for raising interest rates, he noted that “We have much ground to cover to reach maximum employment.” One factor that could hasten a rate hike would be “if sustained higher inflation were to become a serious concern.” In what appears to be an effort to separate the taper decision from expectations for an eventual rate hike, the lion’s share of the speech was a defense against the risk of sustained higher inflation. Powell listed five factors supporting this assessment:
- “The spike in inflation is so far largely the product of a relatively narrow group of goods and services”
- “The [rising] prices of particular goods and services … are beginning to see a moderation in some cases”
- “Broad-based measures of wages … show wages moving up at a pace that appears consistent with our longer-term inflation objective”
- Measures of longer-term inflation expectations “today are at levels broadly consistent with our 2 percent objective”
- “There is little reason to think that” underlying global disinflationary factors which pre-existed the pandemic “have suddenly reversed or abated”