Minutes reveal US Federal Reserve split over job market and bond-buying taper

Washington

FEDERAL Reserve officials felt the US central bank's employment benchmark for decreasing its support for the economy "could be reached this year", but appeared to disagree on other key aspects of where monetary policy should turn next, said the minutes from last month's policy meeting.

The account of the July 27-28 meeting showed different groups worried about inflation and the need to prepare to combat it, but others said it would take time, and require patience from the Fed to put Americans back to work.

As policymakers weighed recent spikes in prices against the ongoing joblessness in the country, they also noted the resurgence of the coronavirus and "the risks that rising Covid-19 cases associated with the spread of the Delta variant could cause delays in returning to work and school, and so dampen the economic recovery".

Fed officials agreed that, as of late July, the benchmark for beginning to reduce the central bank's US$120 billion in emergency bond purchases had not been met, with "most participants" expecting that ongoing job gains meant the standard "could be reached this year".

But beyond that, the minutes portrayed a level of discord deeper than what came through in the Fed's July 28 policy statement, which characterised the US recovery as largely on track, despite the spread of the Delta variant.

While planning for the eventual end of the central bank's asset purchases remained underway, consensus around when and how fast to taper them seemed elusive.

"Several participants" said monetary policy was still needed to fix the damage done to the labour market by the pandemic, and the bond purchases helped that process.

"A few" countered that Fed policy had little left to contribute. "Several" others said the condition of labour markets prior to the pandemic "may not be the right benchmark", given lasting changes to the economy.

Inflation was another source of disagreement among Fed officials, with "a few" saying current high inflation had already met some of the central bank's aims, with others were concerned that inflation might crater in coming months and, as it has for the last decade, undershoot the Fed's 2 per cent target.

Although the health crisis has intensified in the past three weeks, the economic recovery remains largely on track.

US job growth was strong through July, and inflation remained well above the Fed's inflation target - so much so that some central bank policymakers have since urged a quick end to emergency programmes that they argue have outlived their usefulness.

Demand is outstripping the ability of global supply chains and labour markets to keep pace, driving inflation higher.

St Louis Fed president James Bullard is among those who argue that the bond purchases should end soon so that the central bank can raise its benchmark overnight interest rate from the current near-zero level if needed. Fed officials want the bond-buying programme completed before any hike in borrowing costs.

Analysts expect the Fed to announce its plan for a "taper" of its asset purchases as early as the Sept 21-22 policy meeting, with less certainty about how quickly the actual reduction in the bond-buying programme will proceed.

Fed chair Jerome Powell may provide information as well in remarks to the central bank's annual research conference in Wyoming next week.

The Fed acknowledged at its last meeting that progress had been made in recovering the jobs lost to the pandemic.

In December, the central bank said it would not reduce those purchases until there had been "substantial further progress" in the jobs recovery.

At that point, the economy was around 10 million jobs shy of where it was before the pandemic. Employers have added 4.3 million jobs since then, including a total of nearly 1.9 million jobs in June and July, a pace some analysts expect to continue into the fall.

The Fed's preferred measure of prices, the personal consumption expenditures index excluding food and energy costs, rose at a 3.5 per cent annual rate in June, its quickest pace in nearly 30 years. July's reading is due late next week. REUTERS