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The Fed: Fed’s Williams: Labor market hasn’t cleared the hurdle to set off bond tapering

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The U.S. labor market hasn’t seen the ‘substantial’ progress that is necessary before the Federal Reserve can begin to slow down its massive monthly bond purchases, New York Fed President John Williams said Wednesday.

“There has also been very good progress toward maximum employment, but I will want to see more improvement before I am ready to declare the test of substantial further progress being met,” Williams said, in a video address to students at St. Lawrence University.

“Assuming the economy continues to improve as I anticipate, it could be appropriate to start reducing the pace of asset purchases this year,” he said.

Later, in a session with reporters, Williams shied away from giving any specific data point that he was focused on to hit the “substantial” progress threshold.

Williams’s stance suggests he will not support any formal announcement of a tapering of the bond purchases at the Fed’s next policy meeting in two weeks.

Many Fed officials would like the Fed to announce it is ready to start tapering this month. Williams’s stance is important because he is seen as a confidant of Fed Chairman Jerome Powell. It suggests the Fed leadership wants to wait until the next Fed meeting in early November to take any meaningful first step toward tapering.

Since June 2020, the Fed has bought $80 billion of Treasurys and $40 billion of mortgage-backed securities each month to hold down long-term interest rates and support demand.

With the economy growing strongly over the last few quarters, and inflation spiking as the economy reopened, many analysts and Fed officials said it was time for the Fed to slowly pull back its support for the economy.

The disappointing August jobs report was seen as evidence that would support Fed officials who did not want the Fed to announce a tapering plan at its meeting on Sept. 21-22.

The Fed’s Beige Book, released Wednesday, reported the economy lost some momentum over the past month due in part to the delta variant.

Ian Shepherdson, chief economist at Pantheon Economics, said that there may be more disappointing job reports ahead. This may push a tapering decision “down the road.”

“They are still going to do it, unquestionably, but I think maybe they will do it later than people were thinking,” Shepherdson told Bloomberg Television.

A sizable group of Fed officials have been pushing the central bank to start to slow down purchases as soon as possible.

St. Louis Fed President James Bullard said earlier Wednesday that he expects the taper will get going this year despite the weak job August report.

Many economists say there is not much difference between the Fed starting to taper in October or December. Waiting to start until next year would be significant.

The Fed officials who favor tapering in the near-term argue that the labor market is being hit by supply shocks, which asset purchases are not designed to tackle.

Williams said he agreed the economy was bedeviled by supply issues at the moment, but continued asset purchases will help insure demand remains steady over the economic horizon.

“My point really is that the economy is in a state of flux — its a state of constant change and churn. Supply and demand are moving very quickly and are clearly out of balance. When I think about monetary policy I’m really thinking about 2022 and 2023 and thinking about how we maintain strong demand,” Williams said.

Stocks
DJIA,
-0.20%

SPX,
-0.13%

were lower on Wednesday after Bullard’s comments were reported.

The yield on the 10-year Treasury note
TMUBMUSD10Y,
1.345%

has risen as high as 1.37% this month from a low of 1.17% in early August.

In his speech, Williams said he expected inflation to slow down to a 2% rate next year.

He said the delta coronavirus variant is weighing on consumer spending and job growth.

The New York Fed president said there is “a long way to go” before the central bank will meet a separate test to begin to raise short-term interest rates.

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