Fed Watch: Delta Escalation, Yellen Support Bolster Powell’s Cautious Approach

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An upsurge in COVID-19 infections and deaths could slow down the momentum toward withdrawal of monetary stimulus exposed last week in the minutes from the meeting of Federal Reserve policymakers in late July.

Dallas Fed chief Robert Kaplan, who has been pushing for quick action on reducing the Fed’s bond purchases, acknowledged on Friday that the impact of the Delta variant might force him to adjust his views.

“It’s unfolding rapidly,” he said in television comments, saying the new wave is delaying a return to office and impacting hiring. For the moment, Kaplan says he will maintain his stance on announcing a reduction in bond purchases next month, but a material impact on the economic outlook could change his mind.

More telling, perhaps, the Kansas City Fed announced on Friday that it is canceling the in-person Jackson Hole conference this week and will hold it only remotely. The regional bank hosts the conference, which is often a venue for Fed officials to signal the direction of policy. It was also held remotely last year due to the pandemic.

Economic Warnings Signal Slowdown Evolving

Evidence of an economic slowdown came in everything from a weekly decline in airport security checks to fewer restaurant reservations at online services. It remains to be seen what impact the new caution will have on remarks from Fed chair Jerome Powell, who has regularly warned about COVID’s impact on the Fed’s timeline for tapering. He is not likely to jump the gun on the discussion of the Sept. 21-22 policy meeting in the rapidly evolving situation with a specific date.

The minutes from the July 27-28 meeting of the Federal Open Market Committee quickly became old news. A consensus on reducing asset purchases this year seemed to be near at hand.

“Looking ahead, most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year because they saw the Committee's ‘substantial further progress’ criterion as satisfied with respect to the price-stability goal and as close to being satisfied with respect to the maximum-employment goal.”

The catch, of course, is whether the economy evolves as anticipated, and doubts seem to be growing. Even in July, policymakers noted “that the spread of the Delta variant may temporarily delay the full reopening of the economy and restrain hiring and labor supply,” according to the minutes.

Powell’s cautious approach could hold more sway now that Treasury Secretary Janet Yellen, herself a former Fed chair, has expressed support for re-nominating Powell to the job. President Joe Biden’s decision may be made as early as Labor Day weekend.

Uncertainty about COVID is adding to a desire to maintain as much continuity as possible and militating in favor of Powell’s re-nomination.

Yellen was the first Fed chair not to be reappointed in decades as former President Donald Trump broke with a bipartisan tradition to keep the chairman in place if they wanted to stay.

Powell reiterated his deliberative stance last week. Speaking at a virtual townhall for educators and students, Powell cautioned that the pandemic has permanently changed the economy.

“We’re not simply going back to the economy that we had before the pandemic. We need to watch carefully as the economy continues to get through the pandemic and try to understand the ways that the economy has changed and what the implications are for our policy.”

Fed policymakers, as well as investors, will be looking closely at economic indicators for signs of a renewed COVID impact. Data is due out this week on manufacturing , existing home sales , durable goods , and personal income and spending .

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