In his closely watched testimony before the House of Representatives yesterday, Fed Chairman Powell stuck to the script about where monetary policy is going.
This might take on a new dimension in light of tomorrow’s data. Moreover, a somewhat overlooked comment by Richmond Fed Governor Barkin on the criteria for deciding when to taper could alter things.
Powell insisted that the rise in inflation was “temporary”, and related to a small group of goods and services tied to reopening. However, this stands in contrast with other observations such as the one Blackrock’s CEO made. Specifically, yesterday Fink observed that US companies are passing on the “huge price hikes” to consumers to offset supply costs.
Since the start of the week, Pepsico, Cargill, Fastenal, Disney, Marriott, and McDonald’s among others, all announced price increases. Additionally, some even said that they will raise prices again later in the year.
So how is the Fed going to proceed? How does employment play into this?
What’s up with the employment situation?
Probably the key takeaway from the testimony was Powell’s comment that QE will continue until “substantial further progress” is done on jobs, which is “still a ways off”.
The key question here is what metric is the Fed using to measure that progress?
The most recent report from the BLS shows that there are 9.2M job openings in the US, and 9.5M people unemployed. Technically, there are still more unemployed people than there are job openings, contrary to popular comments. But job openings continue to increase, with many companies reporting difficulties in obtaining hires.
Figuring out when the taper will happen
The response to this situation from the White House has been to call for higher wages. However, that gets in the way of the Fed’s mandate to keep prices from inflating.
So how can they square the circle?
On Monday, Barkin commented that the Employment-to-Ratio (ETP) is key for determining the taper’s timing. In fact, other Fed members have also said that before. This suggests that the Fed isn’t paying as much attention as they should to the unemployment rate or even the NFP.
The ETP ratio last stood at 58.0%, which is lower than 61% at the start of the pandemic. Following the last financial recession, the ETP ratio’s minimum of 58.5%, suggests that we are “still a ways off” from when the Fed could decide to cut back on its asset purchasing.
What we are looking for
Analysts are anticipating a drop in tomorrow’s US retail sales data. This is a worrying trend for an economy that is seeking to recover, particularly with retailers being the most affected group during the pandemic.
We can expect June’s retail sales to come in at -0.4%, compared to -1.3% in the prior month. However, excluding autos, the outlook is for 0.4% growth, as opposed to last month’s -0.7%.
Moreover, a little later we get the Michigan Consumer Sentiment Index. For this data, we can predict a higher move from last month’s 85.5 to 86.5.
We can, however, only guess when tapering will actually happen.