Brainard Says Jobs Market Has Ways to Go to Meet Fed Taper Test
The U.S. jobs market still has some ways to go before it improves enough to satisfy the Federal Reserve’s criteria for beginning to reduce its asset purchases, Governor Lael Brainard said Friday.
In the text of a speech intended for delivery to the Aspen Economic Strategy Group, Brainard also suggested that the recent surge in inflation is likely to prove temporary and said that she saw both upside and downside risks to the economy, the latter from the spread of the Delta variant of Covid-19.
The Fed is currently buying $120 billion of assets per month -- $80 billion of Treasury securities and $40 billion of mortgage backed debt -- and has pledged to keep up that pace “until substantial further progress” has been made toward its goals of maximum employment and 2% inflation.
“Employment has some distance to go” to meet that test, Brainard said in the speech. “There is a shortfall of 6.8 million jobs relative to the pre-pandemic level and 9.1 million jobs relative to the pre-pandemic trend.”
Fed officials meeting earlier this week said they would continue to assess that progress at coming meetings.
In the event, Brainard didn’t deliver the speech to the group, though she referenced many of the points it made in a session entirely devoted to questions and answers from those in attendance in Aspen, Colorado.
Saying that it was difficult at the moment to disentangle the various forces at work in the labor market, Brainard said in her speech that she expected to be better able to assess the progress the Fed is making toward its maximum employment goal once economic data for September are released.
That suggests she’d be in favor of putting off any decision by policy makers to taper asset purchases until after their next scheduled meeting on Sept. 21-22.
That contrasts with the position staked out earlier on Friday by Federal Reserve Bank of St. Louis President James Bullard, who told reporters that he wanted the central bank to decide in September to begin reducing its asset purchases.
Brainard said repeatedly throughout the speech that she was attentive to the risks that inflationary pressures could prove persistent and that inflation expectations could move above the Fed’s 2% goal.
“Upside inflation risks have increased.” she said in response to a question at the session. “We’re all highly attuned to those risks.”
But she made clear in her speech that was not her base case.
“Recent high inflation readings reflect supply–demand mismatches in a handful of sectors that are likely to prove transitory,” she said, adding, “Many of the forces currently leading to outsized gains in prices are likely to dissipate by this time next year.”
The personal consumption expenditures price index that the Fed targets rose 4% in June from a year earlier.
Brainard said she didn’t see any signs that the elevated price readings were feeding into inflation expectations in such a way to push them above the Fed’s 2% objective.
The Fed governor said she expects economic growth to remain strong through the balance of the year. Gross domestic product rose at a 6.5% annualized rate in the second quarter, following a 6.3% gain in the first three months of the year.
“There are risks on both sides of the outlook,” she added in the speech.
The upside risk is associated with consumption spending and the high level of household savings, while the downside risk stems from the Delta variant, according to Brainard.
“While the economy’s momentum is strong, vaccination rates remain low in some areas, and fears related to the Delta variant may damp the rebound in services and complicate the return to in-person school,” she said.
She elaborated on that in response to a question at the session, saying those downside risks are even more apparent now than they were just a few days ago when the Fed held its policy making meeting.
She also told the group that she would be in favor of the Fed being more willing than in the past to use its macroprudential regulatory tools to address potential risks to the financial system from its easy money policies.
“I think there are some things that we could do there that we just really -- there hasn’t been the will to do it in the past,” she said.
Brainard has been a Fed governor since 2014. Some Fed watchers see her as a potential candidate to replace Chair Jerome Powell when his four-year term ends in February.
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