A senior Federal Reserve official said the US labour market was tighter than it looks, which could accelerate the central bank’s timeframe for removing some monetary stimulus from the economy.
In an interview with the Financial Times, James Bullard, president of the St Louis Fed, said that despite data showing non-farm payrolls still 8m jobs short of pre-pandemic levels, other indicators were far closer to normal, matching anecdotal evidence of worker shortages.
“I’m evolving toward a judgment where labour markets should be interpreted as fairly tight, and you’re certainly seeing that in firms saying that they’re just gonna go ahead and raise wages for these types of workers. They’re going ahead and saying, ‘let’s pay some signing bonuses to get to get workers in the door’, you’re seeing some businesses actually just staying shuttered because they can’t find enough workers,” Bullard said.
He added that he was “starting to advocate” for the Fed to look at other measures of job market tightness, particularly the unemployment to job opening ratio, which was at a low of 0.8 in February 2020, rose to 5 during the first lockdowns, and was back down to 1.2 in March 2021.
“I would say we should re-examine what we think we’re expecting out of the labour market,” he said. “And the reason I’m kind of pushing people in that direction is I think it’s more consistent with the anecdotal evidence that we’re getting, which is that it’s very hard to hire,” he added.
Bullard is one of the longest-serving members of the Federal Open Market Committee, and while he does not have a vote this year, he will in 2022. In line with other remarks by Fed officials in recent days, Bullard said the central bank was close to launching a discussion about tapering its $120bn-a-month asset purchase programme in light of the improved outlook.
“This involves in my mind a judgment about when you think that the pandemic has come sufficiently under control that you can start to talk about changing the parameters of monetary policy. It does seem like we’re getting close to that juncture,” Bullard said.
“I know a few of my colleagues are more anxious than others to open the discussion, but we’ll see what the Chair decides at the June meeting,” he added.
The Fed has said that the US economy would have had to achieve “substantial further progress” compared with last December, both on inflation and the labour market, before moving to taper asset purchases. Randy Quarles, the Fed vice-chair, noted last week that while the recent rise in consumer prices suggested that test had already been met with regards to inflation, this was not the case with respect to the labour market.
However, Bullard said the Fed had already “achieved quite a bit” with respect to its employment goals — and the central bank may be waiting in vain for payrolls and labour force participation to recover fully — since many of those workers were “marginally” attached to the worker force, and particularly the older ones may not return.
“Even though it’s a booming economy and GDP is growing leaps and bounds, I’m not sure employment is going to follow,” he said, adding that he did not expect monthly job gains as high as 1m in the coming period.
Using alternative measures of labour market tightness, Bullard said, would “potentially give me more comfort, if we thought the pandemic was over, to start talking about changing the parameters of monetary policy”.
Bullard’s views on inflation appeared relatively dovish. He said he expected high inflation — above the Fed’s average 2 per cent target — would be sustained through 2022, but this was entirely consistent with the central bank’s objective to stoke some higher prices as the economy rebounds.
“You see all kinds of data on the economy which is very unusual, including price data. And so it’s not always easy to interpret and separate signal from noise. But to the extent that we can do it, I think things are going fairly well right now,” Bullard said.
He added that he was “very happy” and even “passionate” about the Fed’s new policy framework, introduced last summer, which is far more tolerant of higher inflation for a period of time to allow a more dogged pursuit of full employment.
“You have to make up for periods of misses to the low side with some misses to the high side so that you actually achieve your inflation target of 2 per cent on average,” he said.
Bullard strongly pushed back against criticism being levelled at the Fed from some economists, investors and mainly Republican lawmakers that the US central bank could be forced into a sharp course correction to avoid a 1970s-style inflationary spiral.
“I think it’s hard to see . . . how you’re going to trigger an inflationary outbreak of the type you had in the 1970s and the early ’80s. I am aware that can happen, but I think we’re in a different regime here. And I think we’re playing monetary policy strategy appropriately,” he said.
In terms of future interest rates increases, Bullard suggested that the Fed would tread carefully, moving to raise them from their ultra-low level only after asset purchases had been wound down — roughly the same “playbook” used in the aftermath of the financial crisis.
“I’m cognisant that this is a different situation — maybe things are moving faster, or maybe certain types of pressure just won’t materialise the same way that we thought they would. And to the extent that’s the case, we may have to be nimble, but we have plenty of time to adjust on that,” he said.