The Federal Reserve should press ahead with a plan to dial down its massive pandemic stimulus programme despite an abrupt slowdown in US jobs growth last month, according to a top central bank official.
James Bullard, president of the St Louis Fed, dismissed concerns the labour market recovery was faltering, even after just 235,000 jobs were created in the month of August, and reiterated his call for the central bank to begin scaling back or “tapering” its massive $120bn-a-month bond-buying programme soon.
“There is plenty of demand for workers and there are more job openings than there are unemployed workers,” Bullard said in an interview with the Financial Times. “If we can get the workers matched up and bring the pandemic under better control, it certainly looks like we’ll have a very strong labour market going into next year.”
He added: “The big picture is that the taper will get going this year and will end sometime by the first half of next year.”
Rather than taking his cue from a single strong or weak jobs report, Bullard said he was instead looking for job gains to average out around 500,000 a month this year. That is still roughly the current pace of hiring following August’s report.
“When you’re in a crisis, you have to be prepared for twists and turns,” he said. “These numbers are going to bounce up and down.”
Up until August, the labour market had notched an impressive string of gains, with roughly 1m new jobs in both June and July.
As the unemployment has fallen, Fed officials have indicated they are ready to begin reducing their bond buys this year, which they pledged to keep in place until they saw “substantial further progress” towards achieving maximum employment and inflation that averages 2 per cent.
But the ongoing surge in Covid-19 cases tied to the more contagious Delta variant and fresh evidence that hiring has slowed in many service-oriented sectors like leisure and hospitality has since rattled confidence in the taper timeline.
Bullard on Tuesday acknowledged that Delta-related concerns are having an impact, but stressed that other supply-side issues — including enhanced unemployment benefits that expired for more than 7.5m Americans this week — were also holding people back from returning to the workforce.
“The jobs are there, it’s that the workers may not want to take those jobs right now,” he said, adding that a jump in personal savings during the pandemic and $1,400 of stimulus cheques meant that “households are flush with income”.
He said: “They can afford to be careful about which jobs they take, or they may feel like they can get an even better job by waiting or searching more diligently.”
In a bid to attract new hires, employers have raised wages — a campaign that picked up last month and helped to push average hourly earnings 0.6 per cent higher from July. As more workers return, the St Louis Fed president said he expected the unemployment rate to drop below 5 per cent by the end of this year.
Bullard, who is one of the longest-serving members of the Federal Open Market Committee and will have a vote next year, is one of the more “hawkish” members of the Fed.
He has long urged the central bank to withdraw its stimulus quickly in order to ensure it has the flexibility to raise interest rates next year should inflation turn out to be even more persistent than expected.
“Many have said that once you get into 2022 inflation will moderate. There is a case to be made for that, but there’s also a case to be made that it won’t moderate and may go in the other direction [due to] additional supply constraints coming from international sources now because of the Delta variant,” he said.
To give the Fed “optionality” to raise interest rates in 2022, the Fed should wrap up its asset purchases by the end of the first quarter, Bullard added.
Another reason to taper quickly is the “incipient housing bubble” that might be fuelled in part by the Fed’s ultra-loose monetary policy, Bullard said. Prices have surged in recent months, with the latest national home data from S&P CoreLogic Case-Shiller pointing to a 18.6 per cent increase from June 2020.