Dipping-taper-toe-in-the-water

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The American jobs report published last Friday was a major setback as the number of jobs created in August came to just 235,000. Last Wednesday, the Central Bank of America published the summary of economic developments over the period July and August in the Beige Book. This summary appears eight times a year and is almost always published on Wednesdays two weeks before the Federal Reserve (Fed) interest rate meeting.

What had already been taken into account to some extent was the slower growth of the US economy compared to the previous period. The slowdown in economic activity was largely due to the decline in the hospitality and tourism sectors. Health concerns related to the spread of the delta variant of the coronavirus are to blame.

In other sectors, the slowdown in growth was due to disruptions in supply chains and labour shortages. One example is the decline in car sales due to a shortage of microchips.

The developments in employment, wages and prices determine the central bank’s monetary policy.

Labour market

Rising employment was observed in all twelve Fed districts. The increased demand for low-skilled workers was particularly noticeable. In all districts, demand for labour exceeded supply, leading to significant labour shortages. This development was confirmed by the outcome of the number of vacancies in the United States. For the fifth time in a row, a new record of vacancies was published. In August, the number of open jobs rose to 10.9 million from 10.2 million in July. It is therefore not surprising that some employers are coming up with hefty pay raises and bonuses to lure potential employees. 

Inflation

Because of the scarcity of all kinds of raw materials, the cost of metals and building materials is rising. Disruptions in supply chains are driving up the cost of freight and transportation. Half of the Fed districts are experiencing high inflation and the other half moderate inflation. Overall, it seems that inflation is stabilising at this high level.

However, due to continuing strong demand, several companies indicate that it is relatively easy to pass on increased production costs in their selling prices. It looks like demand will remain strong for the foreseeable future, making the rise in inflation less temporary than central bankers would have us believe. 

Central banks

Yesterday, the European Central Bank (ECB) announced its interest rate decision. As expected, the ECB left interest rates unchanged, but subtly took a step towards winding down the buy-back programme. The buying up of debt paper has been slowed down compared to the previous quarters. The amount of money available for the Pandemic Emergency Purchase Programme (PEPP) was not changed. ECB President Christine Lagarde stressed that there was no question of tapering.

In a fortnight’ time, it will be the Fed’s turn. The developments in the labour market are being closely watched. The number of applications for support fell more than expected last week, and the number of vacancies exceeds the number of jobseekers. It is, therefore, to be expected that the Fed will also dip its toe in a fortnight’ time.

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