By Howard Schneider

WASHINGTON (Reuters) – The Federal Reserve, facing a labor market that may be stalling or on the cusp of a surge, is expected next week to open the door to reducing its monthly bond purchases while tying any actual change to U.S. job growth in September and beyond.

Fed chair Jerome Powell has said that U.S. central banking’s monthly bond purchases of $120 million could be reduced in later this year. This would mark a significant step in ending crisis-era policies in 2020, when the pandemic coronavirus was sweeping the country.

Officials will be open to reducing bond purchases if there is a rebound in employment and the COVID-19 risk recedes, however, they may also want to hold off on any taper if it hinders recovery.

William English of Yale School of Management, an ex-Fed official who was instrumental in the creation of the bond-buying plan that the central bank launched to address the 2008-2009 financial crisis.

English explained that “they will need more data.” They could even end up waiting, if the data is not satisfactory. This is not an easy statement. They are willing to let the door open, but they do not want to commit. This is their mission.

This dilemma increases the stakes of the U.S. next employment report due out on October 8. This data will likely show whether or not the Delta version of the coronavirus has a greater impact on the U.S. economy than Fed officials had anticipated when, earlier this summer, they stated that the country was experiencing a divorce from the pandemic.

Graphic: A slow crawl to “substantial”: https://graphics.reuters.com/USA-FED/JOBS/mopankjnlva/chart.png

‘SUBSTANTIAL FURTHER PROGRESS’

The Fed will hold its next policy meeting on Tuesday and Wednesday, a session that will include the release of fresh economic projections and a new read on officials’ interest rate expectations. These projections include volatile data from last summer, which included nearly one million job gains in June and July, before August’s dropoff, strong inflation numbers and an increase in COVID-19 deaths and infections that outpaced the viral wave of last summer.

Although Fed officials appeared to have come to an announcement of a bond-buying taper at their July policy meeting in late July, data has shifted the opposite direction. John Williams of New York Fed and Raphael Bostic from Atlanta Fed, who are voting members on the FOMC’s policy-setting Federal Open Market Committee(FOMC), want more information before they make a decision.

In December, the Fed stated that it will not alter its bond purchase policy until “substantial additional progress” was made in recovering the 10 million job losses caused by the pandemic.

With the nation concerned about an imminent slide into recession and lack of widespread COVID-19 vaccines, it was sensible at that time to align policy with pandemic job loss. Now policymakers must rely on a job revival that is largely shaped by factors as disparate such as availability of childcare and opposition to mandatory mask wearing in big states like Texas. These forces have had an effect on the ability to hire and on people’s ability for work.

The economy has recouped less than half the 10 million jobs that were lost as of August. Other relevant statistics, like the employment-to-population ratio, are short of what policymakers like Richmond Fed President Thomas Barkin, also a voting member of the FOMC this year, have said they want to see before concluding that the job market was repaired enough to begin reducing the bond purchases.

Officials at the Fed, such as Governor Christopher Waller want to see a taper sooner than others. The purchases do not help with hiring and can be dangerous if long-term rates are low enough to fuel asset bubbles or housing.

Officials have stated that bond purchases must end early next year due to inflation which has been higher than predicted for many months. However, Fed officials expect a recent decrease in inflation to temper the need for Fed to move faster.

Graphic: Downside ‘surprises’ complicate Fed’s task: https://graphics.reuters.com/USA-FED/TAPER/gdvzyqwdnpw/chart.png

HOW MUCH LIKE 2013?

This kind of policy division, especially in an age when data are ranging from scary to optimistic, suggests that the Fed will need to keep its options open over the coming weeks, according to Tim Duy (chief U.S. economist, SGH Macro Advisors) and economics professor at University of Oregon. 

They will act in the same way as 2013. Duy declared that the Fed will clear the way for taper at its next meeting.

At its September 2013 meeting, the Fed adopted language that indicated a shift towards eventual cutting of the last round of quantitative easing it had done after the financial crisis.

Fed officials noted that the economy had “underlying strength”, despite the reduction in federal government spending. The impact of the “fiscal restructuring” was still uncertain so the Committee decided not to adjust its purchasing pace.

The Committee repeated this language again at the next meeting before actually decreasing its bond purchases for December 2013.

The Delta version is the one that’s threatening this time.

Many economists argue that taper discussions are overhyped. A difference in when the Fed starts or stops is not significant.

However, it will signal the U.S. that monetary policy has ended the crisis and shifts focus from inflation to the next phase of the debate about whether the Fed should raise its benchmark overnight rate (federal funds rates) from its current low level.

Officials at Fed want to be clear on this issue.

David Wilcox (a former Fed researcher director, who is now senior fellow at The Peterson Institute for International Economics), said that the macro stakes surrounding the timing of the announcement are quite low. It is crucial to draw inferences about their reading of the inflation tea leaves. Are they anxious to complete their bond-purchase programme in time before raising the federal funds rate? This decision has more significance than mere passing interest.