Fed may use the weakness in the labour market as a reason to postpone the tapering of its asset purchases. If that is the case, the Jackson Hole Symposium is on the cards for the announcement.
Tomorrow the Federal Reserve of the United States (Fed) will present its monetary policy decision. Market participants will also find out the new staff projections for economic growth and inflation, as well as the new dot plot.
It is difficult to prepare for this meeting from an investor’s point of view. Everything points to the Fed signaling a change in monetary policy, starting with discussions about tapering the asset purchases.
The Fed might also find support from the labour market to postpone the removal of the accommodative measures. Because the Fed has a dual mandate to create jobs and to average inflation around 2%, it might wait for both parts of the mandate to justify the removal of accommodative conditions.
So far, the job market lags behind the economic recovery.
American Job Market Behaves Oddly
At first glance, the American job market is booming. After all, the economy is strong enough to create jobs, but employers have a hard time hiring. One can assume that once the savings end and the fiscal stimulus is off the table, the labour market will take off.
But that may take a while, giving the Fed exactly what it needs at the upcoming meeting – an excuse to delay the tapering. Workers who permanently lost their jobs represent about a third of those out of work today, so one cannot talk about only temporary laid-off workers anymore.
How About Inflation?
Inflation data is pressuring the Fed to act on tapering the asset purchases. One way to measure inflation is to monitor economic data, such as the CPI (Consumer Price Index) or the PCE (Personal Consumption Expenditure) – they both warrant a move from the Fed at tomorrow’s meeting.
Another way is to look at the US bank credit as this is how money flows in the fractional reserve banking system. The Fed stepped in so aggressively that the total bank credit is outpacing anything seen since the Second World War.
As such, the Fed may decide to postpone the announcement of the tapering of its asset purchases at this weekend’s meeting on the grounds of a still weak labour market. If it chooses to do so, the chances increase that it will use the upcoming Jackson Hole Symposium in August for the big announcement.