US inflation and FOMC Minutes Likely to Confirm Tapering November Start

US inflation is released today at 8.30 ET and is forecast to come in at 5.3% for September, unchanged from last month, while the core reading is forecast at 4.0%, also unchanged from last year.

At its September meeting the Federal Open Market Committee indicated that reducing its $120 billion asset purchases “may soon be warranted”, with inflation running hot and the labour market improving, although at a slower pace.

Non-farm payrolls disappoint but tapering still on track

United States Non-farm payrolls disappointed last week, coming in substantially below forecast of 500,000 at just 194,000. Nevertheless, analyst consensus suggests that this will not be enough to throw the Fed off course from chairman Jerome Powell’s previously stated conclusion that the employment test “is all but met”.

Indeed, in comments to the press Powell indicated that tapering might even begin in early November at the next policy meeting (2 – 3 November).

US unemployment rate continued to improve, falling to 4.8%, although that decline was partly as a result of the labour force. Women have been leaving the workforce as a function of the impact of the pandemic and school closures. Also there is evidence of older workers bringing forward retirement plans.

The Fed is in something of a bind, as it tries to balance worries that the economy may be overheating with the need to keep the momentum of the recovery in tact.

On that, it will be perturbed by the growth in average hourly earnings, to the extent that this is not matched by a requisite increase in productivity.

There are other factors, though, that the Fed may ave taken into the equation when gauging the state of the labour market, such as the revisions seen in previous months and seasonality factors related to the education workforce – all of which would put a better gloss on the labour data than the headline figure relates.

Tightening labour market to strengthen hawks’ hands

Other things being equal, which is a tricky thing to say where economic matters are concerned, a tightening labour market is a sign of a strong recovery, with employers bidding up wage levels to maintain or increase production and the pool of unemployed workers also shrinking as a consequence of GDP growth.

“The Fed hawks will highlight the pretty fast wage growth as a sign the labor market continues to tighten,” Thomas Costerg, senior U.S. economist at Pictet Wealth Management told Bloomberg last week. “The Fed has worked so hard to build a consensus on this November taper that really at this stage it will be hard to stop the train.”

FOMC September meeting minutes on tap

Following the inflation data release is the minutes of the Fed meeting held on 22 September. If the inflation data doesn’t do much for the dollar in the forex markets, then the FOMC minutes might.

Those trading today’s news will looking for clues on the solidity of the consensus that has now been built around November tapering but also the thinking of members on the ‘transitory’ nature of inflation.

Later in the day, the Fed will release the minutes of the FOMC policy meeting held on 22 September. The question is how much support had built at that point for an autumn tapering announcement as well as whether inflation is still mostly seen as transitory.

Raphael Bostic, president of the Federal Reserve Bank of Atlanta, yesterday came out quite strongly against the notion of inflation being transitory, calling for action to be expedited.

Also market watchers will be hanging on the words of Governor Lael Brainard in an event he is speaking at today.

Brainard is one of the favourites to replace Powell as Fed chairman if President Biden decides not to reappoint him for a second term as pressure from the progressive wing of the Democratic Party mounts, with Elizabeth Warren recently describing Powell as “a dangerous man”.

About Gary McFarlane PRO INVESTOR

Gary was the production editor for 15 years at highly regarded UK investment magazine Money Observer. He covered subjects as diverse as social trading and fixed income exchange traded funds. Gary initiated coverage of bitcoin and cryptocurrencies at Money Observer and for three years to July 2020 was the cryptocurrency analyst at the UK's No. 2 investment platform Interactive Investor. In that role he provided expert commentary to a diverse number of newspapers, and other media outlets, including the Daily Telegraph, Evening Standard and the Sun. Gary has also written widely on cryptocurrencies for various industry publications, such as Coin Desk and The FinTech Times, City AM, Ethereum World News, and InsideBitcoins. Gary is the winner of Cryptocurrency Writer of the Year in the 2018 ADVFN International Awards.