If You Don’t Have Time This Morning
Fed speakers have coordinated communication around the central theme that it is too early to speculate on the timing of tapering. We should expect them to limit their public comments accordingly; the focus will be on their forecasts with the warning that policy changes depend on actual outcomes.
As of Sunday, Bloomberg estimates that the U.S. has delivered 42 million doses of vaccine and the rate of vaccination now exceeds 1.4 million per day.
Recent Data and Events
The highlight of last week was the employment report with its disappointing gain of just 49k employees and downward revisions to November and December. The labor market in aggregate has stalled out in recent months under the weight of the winter wave of Covid-19 cases:
Disappointing to me was softness outside of leisure and hospitality:
The unemployment rate fell from the 6.7% to 6.3%:
This clearly does not yet represent “substantial progress” toward the Fed’s goals especially given the shortfall in overall employment relative to the peak and decline in labor force participation.
On an important upside, hours worked jumped:
More hours worked compensates for softness in the headline number from a production standpoint and also suggests continuing gains for the wage and salary component of personal income. Also note the acceleration in the hiring of temporary help workers:
Overall, I don’t think we should be overly pessimistic about this report. First, never put too much weight on any one report; the weakness outside of leisure and hospitality could be just a one-month anomaly. Second, the increase in hours worked indicates considerable underlying demand for labor. Third, temporary help gained a strong 80.9k in January, accelerating from the 39.0k and 64.3k gains in November and December, respectively. This is traditionally a reliable leading indicator of overall job growth. Fourth, it increasingly looks like January was the peak for the winter wave of the pandemic; as the pandemic eases, restrictions on activity will ease as well.
In addition, the ISM reports for January are also consistent with stronger labor demand than suggested by the headline jobs gain in the employment report. The employment component in the services index jumped from 48.7 to 55.2 while its manufacturing counterpart made a more subdued rise from 51.7 to 52.6. What struck me most though were the anecdotal comments suggesting that firms are struggling with short-term labor supply issues that are depressing topline job growth.
How can this be, given the magnitude of the job losses relative to last year? Partly due to sectoral reasons; workers in leisure and hospitality may not be easily able to transfer into different sectors nor should they necessarily incur the costs of doing so if their jobs are likely to return later this year. Partly also because some workers have chosen to disengage from the labor force for health reasons and others forced to disengage due to lack of childcare options. Such supply constraints would be quickly alleviated if the pandemic comes under control later this year, as hoped for now that the distribution of vaccines is underway. Once the virus is contained, I think the stage is set for rapid labor market improvement. The risk to this outlook obviously is that a slow pace of vaccinations and the rise of variants delays containment.
Note that while the headline weakness in job growth may not indicate anything more than a one-month blip, it will still support political momentum for the large stimulus that Democrats are looking to push through Congress ASAP.
Upcoming Data and Events
A slower week ahead relative to last. On Tuesday we get the JOLTs data for December. The key thing I am watching for is the resilience of job openings. Continued strength there would bode well for recovery prospects later this year. The CPI data comes Wednesday. Core inflation is expected to be 0.2% in January, nothing for the Fed to get excited about. Note also that the Fed will dismiss any upside surprises as transitory; it will be hard-pressed to see inflation as likely to be persistent when unemployment is at 6.3%. Thursday brings the usual initial jobless claims report. Claims unexpectedly fell last week and we are hoping for a continuation of that trend now that Covid-19 cases are falling. Preliminary Michigan consumer sentiment for February rounds out the week on Friday.
Fed speakers this week include Cleveland Federal Reserve President Loretta Mester on Monday and St. Louis Federal Reserve President James Bullard on Tuesday. Federal Reserve Chair Jerome Powell will be discussing the labor market with The Economic Club of New York on Wednesday. I anticipate Powell will be optimistic about job growth later this year but emphasize the existing jobs gap and its impact on inequality as evidence that it remains too early to discuss tapering.
|Central Data Releases Week of 2/8/21|
|Tuesday||JOLTs Job Openings, Dec.||6.400m||6.527m|
|Wednesday||Core CPI, m-o-m, Jan.||0.2%||0.1%|
|Thursday||Initial Jobless Claims||760k||779k|
|Friday||Michigan Sentiment, Feb. preliminary||80.9||79.0|
Fed Speak and Discussion
Federal Reserve policymakers have coordinated their rhetoric since the January FOMC meeting. Summarizing the story:
- A renewed emphasis on the updated policy strategy. It appears that some Fed speakers had lost focus on the new strategy and began speculating on the timing of tapering on the basis of their forecasts. This gave the impression that policy was calendar-based. It’s not. Nor is it forecast-based. It is outcome-based.
- The Fed explained the outcomes necessary before removing policy accommodation in the FOMC statement. These should be our focus. Those outcomes are “substantial progress” toward employment and inflation goals to scale back asset purchases and sustained inflation at or modestly above 2% to hike interest rates.
- The Fed has yet to define “substantial progress.” The Fed has not reached a consensus about what constitutes substantial progress. It is difficult for the Fed to begin a tapering discussion when they don’t know exactly what triggers tapering. My instinct is that labor market outcomes will be more important than inflation outcomes when it comes to tapering and vice-versa when it comes to rate hikes.
- Reaching the Fed’s mandates remains a distant goal. The economy is so far away from the Fed’s goals that there is no upside for policy makers to speculate just yet on the timing of tapering. Doing so risks an unwanted disruption of financial markets.
- Assuming employment improves as expected this year, the economy will eventually make “substantial progress.” I expect that when we see that improvement, Fed speakers will start discussing their views on what “substantial progress” means. This will be a prelude to the tapering discussion.
- The actual tapering discussion will be initiated by Federal Reserve Chair Jerome Powell. This point might be controversial and we may see some pushback on the idea, but it is the clear implication of St. Louis Federal Reserve President James Bullard’s explanation that he looks to “leadership from the chair” regarding the timing of the tapering discussion. This might be Powell exerting some top-down control or the FOMC agreeing to delegate the communication of the tapering discussion to Powell. Either way, hopefully financial journalists will press Powell and others on this element of the communications strategy.
With this in mind, let’s think about the calendar. What is the earliest time to actually have a tapering discussion? We won’t have visibility on “substantial progress” in the labor market until sometime after June. At that point though we should have some sense on where unemployment will end for the year. Assume it looks like that “substantial progress” will be made and will put a 1Q22 tapering on the table. Powell has said the Fed will provide a long communications runway to any tapering. I take this to mean at least a quarter of warning, but that is certainly up for debate. Assume it is at least a quarter and the earliest taper would be at the January 2022 FOMC meeting. In that case, the Fed would want to begin the public tapering discussion toward the end of the third quarter or the beginning of the fourth. Assuming further that Powell will take the lead in the discussion. Altogether, it suggests to me that the natural earliest time that Powell would begin that discussion is at the late-August Jackson Hole conference. That gives us some breathing room.
Monetary policy will be held steady until the data suggests otherwise. Fed speakers should continue to reinforce the Fed’s updated policy strategy. Remember that the Fed is erring on the side of overshooting.
Good luck and stay safe this week!