Fed’s Richard Clarida: Not Time for Taper-talk

Federal Reserve Vice Chair Richard Clarida said last week’s disappointing economic data shows that the recovery is not advanced enough for the Fed to start scaling back the central bank’s major bond purchasing. 

“We have not made substantial further progress,” Clarida said Monday during a virtual speech at an Atlanta Fed conference. “We will certainly give advance warning before we anticipate scaling back the pace of those purchases.”

April’s jobs data showed that employers added only 266,000 jobs last month, significantly missing forecaster’s target of 1 million. Unemployment rose to 6.2%. 

The surprising numbers are being attributed by many toward unemployment benefits that are discouraging laborers from return to work. Virus concerns and school closures also may have contributed to the minimal growth. 

Economists largely agree that there will be little changes to the Fed’s unprecedented monetary policies anytime soon. 

“We are likely to have some taper talk by the end of the year and actual taper starting early next year,” said Willem Buiter, visiting professor of international and public affairs at Columbia University during the conference. “I expect rate hikes in 2022.”

The Fed has left interest rates near zero since the start of the pandemic and maintained a $120 billion monthly bond purchase rate until there is “significant” progress toward unemployment and inflation. The target inflation rate remains at 2% and although officials and economists have warned that it is likely inflation will stay above 2% in coming months, they maintain that the higher prices will be fleeting. 

“I see inflation this year around 3%, coming down to 2.5% to 3% for 2022, and around 2% to 2.5% for the next five years or so,” said Buiter. “I do not believe that raising the inflation rate target is the solution to our problems.” 

There is concern that the current economic policy is pushing inflation too high. U.S. consumer prices in April hit the highest levels since 2009. Still, the Fed maintains that they have the situation under control and will keep an eye on the data going forward. 

“The way in which we bring supply and demand into balance in the labor market, especially in the service sector, may take some time and may produce some upward pressure on prices as workers return to employment,” Clarida said. “We have to be attuned and attentive to that data flow.”