July 30 (Reuters) - The Federal Reserve needs to see more
improvement in the pandemic-hammered U.S. labor market before
pulling back on support for the economy, Fed Governor Lael
Brainard said on Friday, adding that she'll be more confident in
judging that progress once she has September data in hand.
"The determination of when to begin to slow asset purchases
will depend importantly on the accumulation of evidence that
substantial further progress on employment has been achieved,"
Brainard said in remarks prepared for delivery to the Aspen
Economic Strategy Group. "As of today, employment has some
distance to go."
Earlier this week Fed policymakers began tackling in earnest
the thorny questions of how soon and how quickly to trim their
current $120 billion in monthly asset purchases, aimed at
boosting economic growth by pushing down on borrowing costs.
Brainard's assessment of progress on the labor market front
was in line with that of Fed Chair Jerome Powell, who at the end
of the Fed's meeting on Wednesday said the U.S. job market still
had "some ground to cover" before the Fed could start to taper
its bond purchases.
But Brainard also offered something new: a potential hint on
the timing of any taper decision, at least for her.
"Importantly, I expect to be more confident in assessing the
rate of progress once we have data in hand for September, when
consumption, school, and work patterns should be settling into a
post pandemic normal," Brainard said.
The U.S. Labor Department releases its September jobs report
on Oct. 8, and the next Fed policy meeting after that takes
place in early November.
If job gains continue at the same pace as the second
quarter, she said, about half of the 9 million jobs gap relative
to the pre-pandemic trend would be made up by the end of 2021.
"If, instead, the rate of job growth were to accelerate notably,
those levels could be reached somewhat sooner," she added.
In addition to progress on employment, the Fed's taper
decision depends on progress towards the Fed's 2% inflation
Inflation readings in recent months have come in higher than
expected, with the core PCE price index shooting up 3.5% in the
12 months through June, the largest gain in the Fed's preferred
inflation gauge since December 1991. It rose 3.4% in May.
Those high readings are likely to be transitory, Brainard
said Friday, as they reflect supply-demand imbalances in a
"handful" of sectors like cars and travel. On a 24-month
measure, she noted, core PCE inflation is running at 2.3%.
While she is attentive to the risks that upward inflation
pressures could broaden or prove persistent, she said, she sees
no signs that they are getting embedded into consumers' and
businesses' inflation expectations.
"If inflation moves persistently and materially above our
target, we would adjust policy to guide inflation gently back to
target," she said.
Worries about the potential for high inflation are, however,
prompting several of the Fed's 18 policymakers to want to get
going quickly on the bond-buying taper.
Earlier Friday, St. Louis Fed President James Bullard said
the Fed should start reducing its bond purchases this fall so
that it doesn't end up needing to raise rates sharply, and
possibly spark a recession, if inflation remains high.
Brainard's comments did not suggest any such rush. She noted
that the decision to taper is distinct from any decision to
raise rates. That will depend on a three-part test the Fed laid
out last fall: reaching full employment, 2% inflation and being
on track to exceed 2% inflation for some time.
"Remaining attentive to changing conditions and steady in
our step-by-step approach to implementing policy under our new
framework should ensure that the economys momentum is
sufficient when tailwinds shift to headwinds" later this year
and beyond, as the support from massive government spending
during the pandemic fades, she said.
(Reporting by Ann Saphir; Editing by Cynthia Osterman)