The resurgence of the Covid-19 pandemic dealt a heavy blow as Federal Reserve officials abruptly canceled their first face-to-face conference since the start of the pandemic, raising questions about their insistence that the economy faces limited risk from the Delta variant and from plans to reduce its stimulus.
The setback, announced on Friday, with the annual Jackson Hole symposium now virtual for the second year in a row, is the latest in a series of small signs that are piling up that the new outbreak is having a bigger impact than authorities of the Fed expected. The chair, Jerome Powell, was due to deliver his speech on Friday via webcast.
The shift comes at a critical juncture, as the US central bank considers when to start scaling back its emergency economic support, with most officials eager to start scaling back its asset-buying program by the end of this year, according to the minutes of the Fed’s monetary policy meeting of the 27th and 28th of July.
So far, Powell has minimized the impact of the Delta variant. People and businesses have learned to “live their lives despite Covid,” he said, indicating that the central bank’s prospect of improving the economy remains intact despite the resurgence of disease cases and uneven vaccination rates.
“People and companies have improvised and learned to adapt,” Powell said at an August 17 online event with faculty and students. US economic growth surpassed pre-pandemic levels in the second quarter and is expected to be revised upwards this week.
WEAKNESS IN HIGH FREQUENCY DATA
Almost all recovery measures for individual US states monitored by Oxford Economics fell in the last available week. Southern states recorded the sharpest declines, led by Louisiana, Florida and Mississippi.
“Increased consumer caution has weakened demand and mobility, which have fallen to lows in several weeks. Employment has deteriorated, output has declined and the health indicator has fallen as Delta variant contagion has increased,” the team of economists wrote to the USA from Oxford.
Small business hires, monitored by time management company Homebase, fell, while Bank of America credit and debit card data showed a drop in leisure spending over the past seven days. Restaurant reservations through the OpenTable website have also dropped in recent days.
US consumer sentiment also dropped sharply in early August, with an index tracking consumer confidence reaching its lowest level in a decade, a University of Michigan survey showed.
“We’ve got all the easy victories of reopening, and the fact is the virus is catching up to us. So there’s been a bit of a cooling down…the economists got a little too enthusiastic,” said Vincent Reinhart, a former Fed official who is an economist. -Head of BNY Mellon Asset Management.
Others warn not to give too much importance to the slowdown after a jump in economic activity with the reopening and repressed demand released during the summer (in the Northern Hemisphere). “So far, the real-world impacts have been relatively small and localized,” he told Jefferies in an analysis of real-time data, noting that declines in restaurant reservations were led by states with large Covid-19 outbreaks such as Florida and Texas.
Dallas Fed President Robert Kaplan, one of the most vocal proponents of reducing support for the economy, said on Friday that the impact of the Delta variant is “rapidly unfolding” and that it can adjust its views on monetary policy “a little” if it materially slows down economic growth. Kaplan had previously said he would like the Fed to start cutting back on asset purchases in October.
Fed monetary policy makers are also watching closely the various categories that have contributed to an exaggerated jump in inflation due to supply-chain bottlenecks, as well as any signs that price pressures may be increasing.
Many at the Fed, including Powell, say the current high inflation readings are temporary and will fall towards the central bank’s average target of 2%, but some officials are getting more nervous.