Could the Delta variant disrupt the Fed's taper talks?

·3-min read

Top economic policymakers are facing a critical question: Will the Delta variant hold back the more than 6 million Americans still sidelined from work compared to pre-pandemic levels?

Child care concerns and enhanced unemployment insurance benefits are often cited as top reasons for hesitancy in returning to work. But a third reason is fear of contracting the virus, a factor likely to be amplified by the spread of the more contagious Delta variant.

At the Federal Reserve, the policymakers behind the central bank’s economic policies are closely watching the impact of the rising case count as they ponder a pullback in their easy money policies.

“If people are nervous about the Delta variant, that could slow some of that labor market recovery and therefore be a drag on our economic recovery,” Minneapolis Fed President Neel Kashkari told CBS’s "Face the Nation" on Sunday.

Fed Governor Lael Brainard similarly said that the Delta variant threatens the speed of people returning to work, although she noted that she remains optimistic.

“I fully expect that the labor market will recover to as strong or even stronger a labor market than we saw in the previous recovery,” said Brainard in remarks Friday night. “It’s just a question of what’s the pace at which that’s going to take place.”

Taper talks

For now, the central bank is staying the course on its aggressive monetary stimulus: a cocktail of near-zero interest rates and asset purchases that have tilted its balance sheet above the $8 trillion mark.

But the Fed is considering a pullback in the asset purchase program, which is snatching up about $120 billion a month in agency mortgage-backed securities and U.S. Treasuries. Last Wednesday, Fed Chairman Jerome Powell telegraphed that the central bank could, in coming meetings, start tapering the so-called quantitative easing program.

That may hinge on how the economy develops over the coming months. Powell suggested that while the Delta surge will have significant health consequences, he was not too concerned about it materially disrupting the recovery.

“What we’ve seen, though, is with successive waves of COVID over the past year and some months now, there has tended to be less in the way of economic implications from each wave,” Powell told reporters on July 28.

In some countries, the Delta variant does appear to be weighing on monetary policy. In Australia, extended lockdowns are heightening expectations that the Reserve Bank of Australia will defer on slowing its asset purchase program.

“We expect the RBA to walk back on its tapering decision,” BofA Global Research wrote ahead of the RBA’s meeting, which will begin on Aug. 3.

St. Louis Fed President Jim Bullard told reporters Friday that he does not expect lockdowns in the U.S., reiterating his view that he would like to see a taper decision in September with the slowdown complete by the first quarter of next year.

"We should go ahead and get the taper going," Bullard said.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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