Fed officials say tapering could still get started this year

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Several Federal Reserve policymakers on Wednesday signaled that the U.S. central bank remains on track to trimming its massive asset purchases this year, despite the slowdown in jobs growth seen in August and the impact of the recent COVID-19 resurgence.

“The big picture is that the taper will get going this year and will end sometime by the first half of next year,” said St. Louis Fed Bank President James Bullard in an interview with the Financial Times https://www.ft.com/content/7c2fc0ce-e7c0-4083-92e8-e81d9235ab45.

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Bullard dismissed concerns that the labor market recovery was faltering after the U.S. economy in August created the fewest jobs in seven months. He said the labor market could be “very strong” going into next year if the fight against the pandemic continues to improve.

Dallas Fed President Robert Kaplan in a separate appearance said he still supports a gradual wind down of monthly asset purchases starting in October, as long as the economic outlook does not fundamentally change.

“Fear of infection is having an impact” on demand, Kaplan acknowledged at a Dallas Fed Town Hall, adding that he has downgraded his forecast for economic growth this year to 6%, from 6.5%. But he predicted that next year, the economy will grow at about 3% and inflation will rise 2.6%.

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The Fed has promised to keep purchasing Treasury securities and mortgage-backed securities at the current pace of $120 billion a month until there is “substantial further progress” toward their goals for inflation and maximum employment.

Fed officials will meet again in two weeks on Sept. 21 and 22.

New York Fed Bank President John Williams said on Wednesday he felt the standard was met for inflation, but he would like to see further improvement in the labor market before declaring substantial further progress toward the Fed’s employment goals.

“Assuming the economy continues to improve as I anticipate, it could be appropriate to start reducing the pace of asset purchases this year,” Williams said during a virtual event organized by St. Lawrence University.

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Last month, Fed Chair Jerome Powell said that as of July he agreed with most of his fellow policymakers that the central bank should begin reducing asset purchases this year. That was before the Labor Department released data showing the U.S. economy added only 235,000 jobs in August, down sharply from roughly 1 million jobs added monthly in June and July.

Williams said he is more focused on job gains over time than month to month. He said he will look at a range of indicators including the employment-to-population ratio and the labor force participation rate, for insight on labor market strength.

“We just have to see the data as it comes in,” Williams said during a video conference with reporters.

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A report released by the Fed on Wednesday found the U.S. economy “downshifted slightly” in August as the resurgent pandemic hit dining, travel and tourism.

Still, the Fed’s Beige Book, a compilation of anecdotes about the economy, showed persistently strong demand for workers with some employers struggling to hire because of high turnover, early retirements and challenges with childcare.

“The jobs are there, it’s that the workers may not want to take those jobs right now,” Bullard said.

The Delta variant’s spread is starting to pressure consumer spending and jobs growth, Williams said. He expects the U.S. economy to grow by about 6% this year after adjusting for inflation, which he sees moderating next year to about 2%.

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“The emergence and rapid spread of the Delta variant in parts of the country and around the world has introduced a new layer of uncertainty,” Williams said during the event with St. Lawrence University.

Bullard said the Fed should wind down its asset purchases by the end of the first quarter for more “optionality” for adjusting interest rates.

Williams said the Fed will treat decisions on tapering separately from interest rate moves.

“I don’t see any decision we make in terms of tapering as indicating what the timing” will be for lifting rates, Williams told reporters. (Reporting by Jonnelle Marte with reporting by Howard Schneider, Lindsay Dunsmuir and Ann Saphir Editing by Chizu Nomiyama and David Gregorio)

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