Fed's Clarida: employment test to begin bond taper all but met

(Reuters) – The U.S. Federal Reserve has all but met its employment goal to move ahead with reducing its bond buying program, Fed Vice Chair Richard Clarida said on Tuesday, cementing expectations the central bank will start withdrawing its crisis-era stimulus as soon as next month.

FILE PHOTO: Federal Reserve Vice Chair Richard Clarida talks on the phone during the three-day “Challenges for Monetary Policy” conference in Jackson Hole, Wyoming, U.S., August 23, 2019. REUTERS/Jonathan Crosby

“I myself believe that the ‘substantial further progress’ standard has more than been met with regard to our price-stability mandate and has all but been met with regard to our employment mandate,” Clarida said in prepared remarks to the Institute of International Finance virtual annual meeting, as he repeated that the Fed at its last meeting agreed tapering “may soon be warranted.”

Clarida’s upbeat assessment likely echoes the sentiments of his boss, Fed Chair Jerome Powell, who had previously said that he only needed to see a “decent” September U.S. jobs report to be ready to begin to taper bond buys in November.

That jobs report, released by the Labor Department last Friday, showed 194,000 jobs added in September, well short of analyst expectations, but upward revisions to prior months mean the economy has now regained half the jobs deficit it faced in December, when the Fed set a “substantial further progress” hurdle on jobs and inflation in order to begin tapering. Fed policymakers are already almost all aligned that higher-than-expected inflation has met their threshold.

Fed policymakers at their last meeting saw the unemployment rate falling to 4.8% by the end of this year, a benchmark it already reached last month.

The economy has strengthened and “conditions in the labor market have continued to improve,” Clarida said, although he noted the pandemic continues to weigh on employment and participation.

Prior to the jobs data, Fed policymakers had been split between those who already viewed this year’s gains as ample enough to begin reducing the asset purchase program and those awaiting a little more evidence the jobs recovery remained on track. The Fed’s next policy meeting is scheduled for Nov. 2-3.

In his speech, Clarida also repeated the Fed’s view that once tapering has begun, it will likely conclude in the middle of next year.

The Fed has been buying $120 billion of Treasuries and housing-backed securities a month as part of its emergency response to the COVID-19 pandemic in order to help keep borrowing costs low, but has increasingly emphasized the bond buys have outrun their usefulness in the current environment.

U.S. economic output has already rebounded higher than pre-pandemic levels, Americans are sitting on at least $2.5 trillion in excess savings accumulated during the pandemic, and consumer spending remains strong. Bond buys most directly affect demand whereas economies worldwide are struggling with labor and goods shortages.

Indeed, the surge in demand as the U.S. economy reopened has caused a spike in inflation with persistent supply bottlenecks set to keep price increases well above the Fed’s 2% average inflation goal through the end of the year and into 2022.

If inflation does not begin to subside next year, as most Fed policymakers including Clarida still expect, the central bank could be forced to raise interest rates from near zero before the labor market is fully healed. “The risks to inflation are to the upside,” Clarida acknowledged, although he played down any perception that the Fed will face a choice between its two mandates and said inflation expectations remain anchored.

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