The Bank of Canada may be trimming its asset purchases, but U.S.central bankers are giving themselves ample wiggle room to see how the economy evolves.
“We want to see a string of months like that so we can really begin to show progress toward our goals,” Powell said earlier this month in response to a blockbuster March employment report. The word is generally defined as a sequence of similar events — in this case, monthly gains of a million jobs. San Francisco Fed President Mary Daly, reacting to the blowout March retail sales report, reiterated the need for “repeated months of this before we can distinguish optimism about the future from the realization of the future.”
Tim Duy, a former Bloomberg Opinion contributor who’s now chief U.S. economist at SGH Macro Advisors, quipped that he cringed a bit when he heard Powell say this, writing in a note:
“I saw where this could go. In a world where everyone is looking for clues about the tapering timeline, the definition of a ‘string’ is important. Is Powell sending a signal? Is he hinting at the timeline for tapering? Is it three reports? Or four? Or five? Is it few, several, or many? I can almost guarantee that financial journalists will start pressing Powell to define ‘string.’”
They’ll get their best chance to do so during Powell’s press conference after the Federal Open Market Committee’s decision on Wednesday. Adding to the intrigue around the Fed’s view on when it should reduce its $120 billion of monthly asset purchases, the Bank of Canada surprised markets with a hawkish tilt last week, announcing that it would cut purchases of federal government bonds to C$3 billion ($2.4 billion) a week from C$4 billion. Governor Tiff Macklem and other policy makers said the economy may recover from the Covid-19 pandemic sooner than expected, which could lead them to raise interest rates as soon as next year.
Don’t expect Powell to be cornered by the Bank of Canada or the press. The Fed chair has emerged from the coronavirus crisis with a new monetary-policy framework that focuses on outcomes over outlooks, helping him to stay on message and avoid any slipups. Perhaps most infamously, he suggested the central bank was “a long way from neutral” in October 2018, sparking a sharp drop in the stock market and forcing the Fed to abruptly lower interest rates less than a year later. All indications suggest he will kick off the conversation about achieving “substantial further progress” toward the bank’s labor market and inflation goals on his own terms.
Still, that brings Fed watchers back to the word “string.” As I noted in a column after March’s consumer price index data, May’s CPI will be released on June 10, less than a week before another FOMC decision. In all likelihood, headline inflation will be comfortably above 2% for the third consecutive month. Meanwhile, labor-market observers see a good chance of employers adding 1 million or more workers in each of the coming months. If two months is coincidence but three counts as “repeated,” that puts the central bank’s June meeting squarely in focus. Of course, policy makers also gather in July and September, while the Kansas City Fed’s Jackson Hole Economic Symposium takes place in August, so there’s always an excuse to delay the countdown.