Has The Taper Been Tabled?

A funny thing happened on the way to the taper, the U.S. jobs market hit a brick wall.

Last week’s underwhelming jobs report for August, which showed the U.S. economy adding only 235,000 jobs—less than a third of the consensus estimate of 740,000 and down sharply from July’s upwardly revised total of 1.05 million, may have put the kibosh on the Federal Reserve’s prospective plan to start reducing its $120 billion a month purchases of government and mortgage securities.

Last month, you’ll remember, Fed chair Jerome Powell, in his Jackson Hole speech, seemed to have joined the bandwagon started by his central bank colleagues calling for the Fed to start the tapering process soon. “If the economy evolved broadly as anticipated, it could be appropriate to start reducing the pace of asset purchases this year,” he said. However, he also provided this caveat: “Today, with substantial slack remaining in the labor market and the pandemic continuing, such a mistake could be particularly harmful.”

Friday’s job report could have provided enough of a reason not to taper, or at least put it on hold. Particularly discouraging was the net no new jobs in the leisure and hospitality industry after adding 350,000 jobs a month over the prior six months, including a net loss of 42,000 jobs in bars and restaurants.

That’s not to say that the report was a total washout. In fact, there were several elements that supported the argument for the tapering process to begin soon.

The headline unemployment number improved to 5.2% from 5.4%. More importantly, perhaps, average hourly earnings rose by 0.6% from the prior month and 4.3% versus one year earlier. Indeed, weekly earnings have risen by nearly 10% at an annualized rate over the last three months.

That rise in wages could make inflation more sticky and less likely to be transitory, despite what Powell continues to assert, meaning the Fed should try to get ahead of the inflation momentum before it gets out of control.

But other recent indicators besides the jobs report are pointing to an economic slowdown, which could give the Fed pause to pause the taper talk.

The Conference Board’s consumer confidence index dropped more than 11 points in August to 113.8, well below expectations and its lowest level since February. That followed weaker consumer sales in July. And on Monday, Goldman Sachs lowered its forecast for U.S. economic growth this year to 5.7% from 6.0%, citing the spread of the Delta variant—which is causing at least some people to shy away from eating out—and “fading fiscal stimulus” from Uncle Santa, i.e., no more free money.

The Fed’s next meeting is September 21-22, at which time it may reveal more about its taper plans. Right now, it looks like the Fed could go either way. But my money would be on no taper unless the Fed believes that it has said so much lately in favor of tapering that it risks losing some credibility if it doesn’t at least start the process. In that case, the Fed may opt to split the baby, announcing a tiny taper to begin in the fourth quarter, maybe by $10 billion a month, to $110 billion.

However, it may also hold its fire and wait for more confirmation that the jobs market really has hit a wall and that it would therefore be “harmful” if it started tapering now.

If Powell has shown anything in his tenure as Fed chief is that he is nothing except patient. There’s little reason to believe, then, that he will be willing to start tapering when there are so many uncertainties about the forward path of the economy.

The Delta variant has simply made it too dicey to make significant policy changes now, even if any tapering is likely to be modest. It will likely take several months, likely into next year, before we get a consistent read on how much the variant affects our lives. The introduction of booster vaccines or even entirely new ones will play a major role in that, but we have a ways to go before we know more.

That will suit Powell just fine.

Let’s also not forget that Powell’s renomination as Fed chair will depend a great deal on how he handles the economy and the markets for the remaining few months of his term, which ends early next year. There is absolutely nothing in it for him to start tightening policy, no matter how negligible, if he seriously wants to be renominated, and all indications seem to argue that he does.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.

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