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Fed officials: Bond taper still hinges on continued job growth

·3 min read
FILE PHOTO: Federal Reserve Board Governor Lael Brainard speaks at the John F. Kennedy School of Government at Harvard University in Cambridge

By Howard Schneider and Ann Saphir

WASHINGTON (Reuters) -U.S. Federal Reserve officials including one influential board member on Monday tied reduction in the Fed's monthly bond purchases to continued job growth, with a September employment report now a potential trigger for the central bank's bond "taper."

The Fed last week said a reduction in its $120 billion in monthly bond purchases could be warranted "soon," and Fed Chair Jerome Powell at a press conference Wednesday said it would take one more "decent" jobs report to set the process in motion.

But while some policymakers have said they already feel bond purchases should be cut, those speaking Monday stopped short of saying the economy had fully cleared the Fed's benchmark for a bond taper. The central bank wants to phase out its bond purchases, with an eye toward eliminating the program altogether next year, before its next policy discussion over when to raise interest rates.

U.S. employment is "still a bit short of the mark" for the Federal Reserve to taper, Fed Governor Lael Brainard said on Monday in remarks highlighting the risk that a resurgent pandemic may continue to thwart hiring into the fall.

Brainard said she agreed that if hiring continues "as I hope," the economy "may soon meet the mark" that would warrant scaling back the Fed's $120 billion in monthly bond purchases.

But in remarks prepared for a National Association for Business Economics conference, she also cautioned that the slowdown in hiring seen in August, when only 235,000 jobs were added to U.S. payrolls, could continue as the spread of the coronavirus Delta variant hits restaurants, travel and other parts of the economy.

"Employment gains flatlined in August in the leisure and hospitality sector...As a result of Delta, the September labor report may be weaker and less informative of underlying economic momentum than I had hoped," Brainard said. "We need to be humble about our ability to correctly anticipate future economic conditions given the unpredictability of the virus."

Brainard has been an influential voice on policy since joining the Fed in 2014, and her comments indicate how a final decision on when to reduce the Fed's bond purchases may hinge on the upcoming jobs report for September. That report will be released on Oct. 8, and will be the last employment report the Fed has before an early November policy meeting.

Brainard in her remarks focused on the fact that despite recent progress in hiring, "employment remains over 5 million below pre-COVID levels and nearly 8.5 million below where it would have been in the absence of COVID."

The recovery in labor force participation has also lagged, she said, a fact that distorts data showing, for example, that there are more job openings than unemployed. Over time, she said, she is confident people who have left the work force will begin looking for jobs again.

In separate remarks New York Fed president John Williams said the economy had made "very good progress toward maximum employment," but stopped short of saying the United States had made the "substantial further progress" the Fed wants to see before reducing its bond purchases.

That may be on the horizon, however, he said.

"Assuming the economy continues to improve as I anticipate, a moderation in the pace of asset purchases may soon be warranted," Williams said.

Similarly, Chicago Fed president Charles Evans told the NABE conference "I see the economy as being close to meeting the 'substantial further progress' standard we laid out...If the flow of employment improvements continues, it seems likely that those conditions will be met soon and tapering can commence."

(Reporting by Howard Schneider; Editing by Andrea Ricci)

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