Faced with continued inflationary pressures far above the FOMC’s 2% target, a strong labor market but one that is far from what might be considered full employment, and an economy growing at somewhere in the 2% range in the past couple of months, should the FOMC start tapering at its November meeting or put off that decision at least until its December meeting? One factor that will be important is the flow of key incoming data, which will be critical to the decision process. We know that job markets are tight, but job creation has steadily declined from its peak in July to only 194,000 jobs created in September. New claims for unemployment insurance continue to decline, but the number of unemployed people still exceeds 8 million. The Committee will not get a reading on job creation for October until after its November meeting.
As for GDP, the economy grew a healthy 6.7% for Q2, but that was before the fourth wave of COVID hit the economy. Estimates of just how much slowing has occurred in Q3 have varied widely. For example, the Conference Board predicted a slowing to 3.5% (https://www.conference-board.org/research/us-forecast), whereas the Philadelphia Fed’s Survey of Professional Forecasters cut its estimate by 70 basis points to 6.8% (https://www.philadelphiafed.org/surveys-and-data/real-time-data-research/spf-q3-2021), but this forecast was out in early August. At the other extreme, the Atlanta Fed’s GDPNow measure was just cut to 0.5%. The Bureau of Economic Analysis’ first estimate of GDP growth for Q3, just released today on October 28, is 2% and shows even greater slowing than most of the estimates.
As for prices, in August, PCE was up 0.4% for the month and 4.3% year-over-year. We already have a reading on the CPI in September, which was up 0.4% and up 5.4% year-over-year as compared with 0.3% for August and 5.3% year-over-year. The Committee won’t get a reading on PCE, its preferred measure, until October 29, right before its November meeting.
Because of the timing of the data releases, it is likely that the FOMC has relied on the recently released Beige Book for more granular and anecdotal information on growth and prices in forming its view on appropriate policy. Here were several common threads in the October Beige Book. Growth, for example, was characterized as at best modest or moderate in eleven of twelve districts, with only the Dallas district reporting solid growth. In Fed speak, modest is meant to characterize growth as slightly under 2%, whereas moderate is meant to suggest growth slightly over 2%. These characterizations are clearly in line with the BEA’s number that was just released. Employment growth was characterized as modest mostly because of tight labor markets and lack of supply rather than lack of demand for workers, which was strong. Prices continue to accelerate and/or remain high relative to the 2% target. Finally, housing markets were fairly consistently characterized as firm to strong, with prices continuing to move up in most districts.
So, if the economy is slowing and labor markets are not yet at levels meeting the FOMC’s definition of full employment, but inflation continues at a pace exceeding its target by a factor of two, what does the FOMC do? Does it start its policy tightening process now because of inflation but risk exacerbating an already slowing economy and jeopardizing its employment objectives; or does it simply cling to the point that it views inflation as transitory and wait a bit longer? It is interesting that Secretary Yellen sees inflation as moderating into 2022 and argues that the Fed is not about to lose control of inflation (https://www.thedailystar.net/business/global-economy/america/news/yellen-sees-us-inflation-moderating-2022-2206476). But of course, she is no longer chair of the FOMC and has no vote. It is noteworthy that Atlanta Fed President Bostic recently observed that “Transitory is a dirty word,” and that it is no longer appropriate for policy makers to use the term to characterize the current inflation situation (https://www.bloomberg.com/news/articles/2021-10-12/fed-s-bostic-says-transitory-is-dirty-word-as-inflation-lasts). President Bostic is a voting member of the FOMC and has voted with the majority up to now on the current path of policy. Will he and other voting member decide to stay the course for now or decide, instead, that it is time to act? It might be that the data to be released between now and the meeting will determine the outcome.
Robert Eisenbeis, Ph.D.
Vice Chairman & Chief Monetary Economist
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