Fed monitor: “Still a long way to go” – Fed is currently ‘employment based’

Key takeaways

The Fed remains outcome-based (or, to be more precise, employment-based near-term) and with the weak jobs report on Friday, we do not expect the Fed to change policy signals near-term. The likelihood of a hawkish shift already in June has declined.

The Fed still thinks the labour market recovery has “a long way to go”, which seems to have become the new mantra. The Fed does not expect the high inflation prints to continue, when base effects start to drop out.

We are still more upbeat on the labour market recovery than the Fed and still expect the Fed to move in a more hawkish direction in September Actual tapering is likely to begin in January 2022.

Last week: “Still a long way to go”

Based on recent Fed speeches, consensus among the FOMC members is that the economic outlook looks brighter due to mass vaccination (reducing risks and uncertainty) but that the economic recovery still has “a long way to go”, which seems to be the key phrase at the moment. Also, most FOMC members recognise that inflation is now higher but they expect inflation to move lower again, as base effects drop out and demand moves back into services away from goods. The Fed remains outcome-based.

Growth/Labour market: Fed needs to see big jobs numbers

After the weaker-than-anticipated jobs report on Friday, it is important to stress that everything seems to be about the labour market recovery near-term and the Fed is unlikely to move in a more hawkish direction until they see a more significant rebound. Unfortunately, the Fed still does not want to clarify when it thinks the labour market recovery is well underway. While Friday’s jobs report was weaker than anticipated, we think it is worth noting that employment in “Leisure and hospitality”, the sector hit the hardest by the pandemic, rose more than what we normally see in the beginning of the year due to the gradual easing of restrictions.

Last week, Fed chair Powell said that “The economic outlook here in the United States has clearly brightened" but ”hat “it has been slower for those in lower paid jobs” noting that 20% of workers in the lowest earnings rung were still unemployed a year after the start of the pandemic (6% for the highest-paid workers).

In his speech “The Economic Recovery: Are we there yet?”, 3 May, NY Fed President John Williams had some interesting reflections worth noticing. First of all, he said that “While I am optimistic that the economy is now headed in the right direction, we still have a long way to go to achieve a robust and full economic recovery”. Williams said that he likes to look at the employment-to-population ratio, which remains more than 3pp below the prepandemic level in February 2020. Therefore, the US economy “needs big jobs numbers for some time” to get back on its feet. Also Cleveland Fed President Loretta Mester and Minneapolis Fed President Neel Kashkari highlighted the big unemployment gap last week.

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