The Federal Reserve has telegraphed that it will soon take the first steps in paring back its extraordinary monetary stimulus to the economy, but Fed officials are split on exactly when to start that process.
For many of the 18 policymakers on the central bank’s Federal Open Market Committee, it could all come down to a single point of data due this week.
“A non-committal Fed puts the focus squarely on Friday’s jobs report,” ING Economics wrote Tuesday.
The August jobs report, to be released by the Bureau of Labor Statistics on Friday morning, will be the last read on employment before the Fed’s next policy-setting meeting on Sept. 21 and 22.
At the heart of the debate: when the Fed should start slowing its purchases of U.S. Treasuries and agency mortgage-backed securities. Under the so-called quantitative easing program, the Fed has committed itself to purchases at a pace of about $120 billion per month until “substantial further progress” is made on the economic recovery.
Most Fed officials have acknowledged eye-popping inflation readings as a sign of solid demand in the U.S. economy. But most Fed officials also acknowledge the need to plug the shortfall of workers in a labor market that has been slower to recover.
For Federal Reserve Governor Christopher Waller, the August jobs data could be his green light to hit the “substantial further progress” mark and begin a slowdown in asset purchases.
“I think that one more good job report, if it's in the 850,000 to 1 million [range], will be sufficient to claim substantial progress in employment for tapering,” Waller told Yahoo Finance Friday.
That goal post is higher than most of Wall Street’s estimates for August payroll gains. The median estimate, as gathered by Bloomberg, is for 745,000. That may be fueling a consensus among Fed watchers for the central bank to wait until the end of the year before announcing a taper.
“We think the Fed is going to take away or at least reach for the punchbowl fairly soon — maybe not in September, maybe not even November, but probably by December,” Mike Schumacher of Wells Fargo Securities told Yahoo Finance Tuesday.
A divided FOMC
That timeline may be corroborated by commentary from Fed Chairman Jerome Powell, who said Friday that the labor market had made “clear progress” — not “substantial further progress.”
Still, the committee appears scattered on the timing of a taper. Chicago Fed President Charles Evans and Minneapolis Fed President Neel Kashkari are among the FOMC members that have said they would like to see more employment reports before slowing asset purchases.
But others say the labor market recovery wouldn’t be upended by a taper, arguing in favor of starting the process as soon as possible.
“I don’t see that this accommodation through tapering is really providing a whole lot in terms of support for solving the unemployment problem,” Philadelphia Fed President Patrick Harker told Yahoo Finance on Friday.
Kansas City Fed President Esther George similarly said it is already “time to begin” tapering, as Dallas Fed President Robert Kaplan outright called for a taper announcement in the Sept. 22 decision.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, YouTube, and reddit