Fed’s Kashkari Wants ‘Few More’ Strong Job Reports Before Taper
A few more strong jobs reports over the coming months would mark enough progress in the recovery from the pandemic to allow the U.S. central bank to begin winding down its bond-buying program, Federal Reserve Bank of Minneapolis President Neel Kashkari said.
“If we see a few more jobs reports like the one we just got, then I would feel comfortable saying yeah, we are -- maybe haven’t completely filled the hole that we’ve been in -- but we’ve made a lot of progress, and now, then will be the time to start tapering our asset purchases,” Kashkari said in an interview with Joe Weisenthal and Tracy Alloway on Bloomberg’s “Odd Lots” podcast, recorded on August 9.
The Fed is currently holding its benchmark interest rate near zero and purchasing $120 billion of U.S. Treasury and mortgage-backed securities as part of a program launched last year -- at the onset of the pandemic -- to support the economy by anchoring longer-term borrowing costs.
Fed officials led by Chair Jerome Powell have said they will continue the purchases at the current pace until the economy has made “substantial further progress” toward their goals for employment and inflation, which many believe will be met in the coming months.
Those expectations were bolstered Aug. 6 by a strong Labor Department report on jobs for the month of July, which showed a second straight month of job creation in excess of 900,000 -- bringing the total shortfall in headcount relative to pre-pandemic levels to around six million.
Kashkari, since joining the Fed in 2016, has consistently been one of the central bank’s most dovish policy makers. In June, the last time Fed officials published projections for interest rates, he was one of five on the 18-strong Federal Open Market Committee who expected it would not be appropriate to begin raising rates before the end of 2023.
While the FOMC is only looking for “substantial further progress” toward full employment before it begins winding down its bond-buying program, it has said it won’t begin raising rates before full employment is achieved. According to Kashkari, that may mean even higher levels of employment as a share of the population than prevailed immediately prior to the onset of the pandemic.
The employment-to-population ratio for “prime working-age” Americans -- those between the ages of 25 and 54 -- reached a 19-year high of 80.5% in January 2020. But data on wages and productivity in 2019 and early 2020 were “not suggesting high inflation was around the corner,” Kashkari said.
“I’m not convinced we were actually at maximum employment before the Covid shock hit us. So, that’s exactly why I want us to be really humble about declaring, ‘This is as good as it can get’,” he said.
Getting labor force participation and employment rates “at least back to where they were before, but not necessarily even declaring victory when we do that -- I think that’s a reasonable thing for us to try to achieve.”
Last summer, the Fed unveiled changes to its framework for monetary policy making following an internal review of its practices that spanned a year and a half. One change Fed officials made was redefining their interpretation of the mandate given to them by Congress -- to target maximum employment in the U.S. economy -- as a “broad-based and inclusive goal.”
Still, the Fed will ultimately be limited by inflationin the employment outcomes it can hope to achieve, Kashkari said. The Minneapolis Fed chief said he shares the view of many of his colleagues that the current bout of price pressures is transitory and will dissipate as the economy moves past the pandemic, though inflation rates could rise down the road at higher levels of labor utilization.
“We do not have the ability of targeting, for example, the Black unemployment rate -- and saying, ‘We need to get the Black unemployment rate to X, and we’re not going to be at full employment until we get it to X,’ because we have to pay attention to what that means for, on the inflation side of our dual mandate.”
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