Fed’s Brainard Says Labor Market May Soon Meet Mark for Taper

·3 min read

(Bloomberg) -- Federal Reserve Governor Lael Brainard said the labor market may soon meet her yardstick for scaling back asset purchases, while the Covid-19 delta variant could raise upside risks for inflation as supply constraints last longer.

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“Employment is still a bit short of the mark on what I consider to be substantial further progress,” Brainard said Monday in the text of her remarks prepared for the annual meeting of the National Association for Business Economics. “But if progress continues as I hope, it may soon meet the mark.”

Brainard said delta has been more disruptive than expected and stressed that starting the taper did not start the countdown to raising near-zero interest rates.

“No signal about the timing of liftoff should be taken from any decision to announce a slowing of asset purchases,” she said, while cautioning that forecasters have to be nimble and evolve as new risks appear.

“We had expected a smooth rotation from goods spending to services spending during a complete reopening this fall, but delta has slowed this process,” she said. “As a result of delta, the September labor report may be weaker and less informative of underlying economic momentum than I had hoped.”

U.S. central bankers last week left their benchmark interest rate unchanged in a range of 0% to 0.25% and said tapering their $120 billion in monthly asset purchases “may soon be warranted” if the economy continues to progress toward their maximum employment goal. Chair Jerome Powell told reporters the process could start as soon as the Fed’s Nov. 2-3 meeting.

Brainard said she expects inflation to decelerate. Fed officials have a 2% target. Prices rose 4.2% for the year ending July.

Upside Risks

“With delta disrupting the rotation from goods to services and prolonging supply bottlenecks, it is uncertain just how fast and how much inflation will decelerate over the remainder of the year and into next year,” Brainard said. “Therefore, I am monitoring a few upside risks closely.”

Fed officials forecast last week the economy will expand at a 3.8% rate next year with further gains in employment and moderating inflation.

Brainard pushed off suggestions that the coronavirus has done permanent damage to the labor force, pushing the labor force participation rate lower.

“The decline in labor force participation appears to reflect COVID-related constraints that have been prolonged by delta rather than permanent structural changes in the economy,” she said. “Virus conditions may be driving an important wedge between labor supply in the near term relative to the medium term.” Fed officials are trying to separate their asset purchase taper from raising interest rates. Nevertheless, half of the 18-member committee this month said they wanted to raise rates next year.

Officials have set a three-part test on raising interest rates: Inflation must be at 2%; it must be on track to “moderately” exceed 2% for a time; and the labor market must meet their definition of maximum employment.

(Adds more Brainard comment from eighth paragraph.)

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