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By Lindsay Dunsmuir
WASHINGTON (Reuters) – The resurgence of the COVID-19 pandemic has dealt its most visible blow to date as Federal Reserve officials abruptly canceled their first in-person conference, raising questions over their insistence on the fact as the economy faces limited risk from the Delta strain and plans to dial support support during times of crisis.
The setback, announced Friday night, with the annual symposium in Jackson Hole, Wyoming, now virtual for the second year in a row, is the latest in a series of minor but accumulating signs the new wave is having more impact than Fed officials had not expected. President Jerome Powell was already scheduled to deliver his opening address Friday via webcast.
It comes at a critical time as the US central bank considers when to start cutting back its extraordinary support to the economy. Most policymakers wanted to start cutting back on the Fed’s asset purchase program by the end of this year, according to the minutes of the July 27-28 policy meeting.
So far, Powell has played down Delta’s impact. People and businesses had learned to “live their lives, despite COVID,” he said, indicating that the central bank’s outlook for an improvement in the economy remained intact despite the resurgence of cases and rates of uneven vaccination.
“People and businesses have improvised and learned to adapt,” Powell said during an Aug. 17 webcast with teachers and students. U.S. economic growth has exceeded pre-pandemic levels in the second quarter and is expected to be revised upwards later this week.
That confidence could now be misplaced with the rapidly changing situation causing potential warning signs to appear on an indicator dashboard.
HIGH FREQUENCY DATA FAILS
Almost all recovery measures for individual US states tracked by Oxford Economics have plummeted in the last available week. The southern states recorded the largest declines, leading Louisiana, Florida and Mississippi.
“Greater consumer caution has weakened demand and mobility, which fell to multi-week lows. Employment deteriorated, production fell and health monitoring fell amid rising contagion of the Delta variant, “wrote the Oxford team of American economists.
Deaths from COVID-19 in the United States peaked in five months last week as the most contagious Delta variant rages in areas with low vaccination rates. Cases continue to rise and the United States as of Friday averaged about 139,000 new infections per day.
Small business hiring tracked by time management company Homebase declined slightly, while Bank of America credit and debit card data showed a decline in leisure spending over the past seven days. Restaurant reservations through OpenTable have also fallen in recent days.
U.S. consumer confidence also fell sharply in early August, hitting its lowest level in a decade, with more negative outlook on everything from personal finances to inflation and jobs, a University survey showed. from Michigan.
“We’ve had all the easy wins from the reopening, and the point is the virus is catching up with us. So there’s a certain chill… economists have gotten a little too enthusiastic,” said Vincent Reinhart, a former staff member. from the Fed who is chief economist at BNY Mellon Asset Management.
Goldman Sachs economists lowered their forecast for third-quarter economic growth to 5.5% from 9% on Wednesday, citing the prolonged impact of the Delta variant, although they revised their estimates upward for the fourth. quarter and most of next year.
Others are warning not to read too much into the downturn after a surge in economic activity amid the reopening and pent-up demand released over the summer. “So far, the real-world impacts have been relatively small and localized,” Jefferies said in his analysis of the real-time data, noting that the declines in restaurant reservations had been led by states with large epidemics. of COVID-19, such as Florida and Texas.
However, there appears to be a growing crisis of confidence among some large employers, many of whose offices have been half-empty for more than 18 months. Apple Inc postponed the return to its offices until January at the earliest on Thursday.
Dallas Fed Chairman Robert Kaplan, one of the central bank’s strongest supporters of reducing support for the economy, said on Friday that the impact of the Delta variant was “unfolding rapidly” and that ‘He could adjust his stance on monetary policy “somewhat” if it slows economic growth significantly. Kaplan has previously said he would like the Fed to start cutting back on asset purchases in October.
SUPPLY CHAIN PROBLEMS
Fed policymakers are also watching closely the handful of categories that have contributed to a disproportionate jump in inflation due to supply chain bottlenecks, as well as any signs that price pressures may sag. ‘to expand.
Many at the Fed, including Powell, maintain that the current high inflation figures are temporary and will slide towards the central bank’s average 2% target, but some policymakers are increasingly anxious.
Consumer price increases in the United States slowed in July even though they remained at a 13-year annual high, and there were tentative signs that inflation had peaked. The thrust fueled by the Delta variant puts pressure on that premise.
China’s “zero tolerance” COVID-19 policy has seen a terminal at its second-largest container port handling volume temporarily closed last week due to an outbreak, and several other Chinese ports have faced additional congestion as ships were diverted and cargo processing slowed due to stricter disinfection measures.
Major international shipping groups have warned customers of delays and route adjustments as global supply chains come under additional pressure, which could keep price pressures high in the United States for a range of products. parts and goods.
The month-long global semiconductor shortage that has driven up prices for new and used vehicles shows no signs of slowing down as the Delta variant spreads to Asian countries that are home to auto factories and chip factories.
Toyota, the world’s largest automaker in terms of sales volumes, said Thursday it will cut its global production slated for September by 40%, a move that has an impact on most of its North American factories.
If supply issues in the United States, including a labor shortage, persist even as vaccinations, boosters, better treatments, and healthy savings keep demand from cratering, the chances of a The Fed’s error will increase if it is forced to raise interest rates quickly to keep a lid on inflation, said Diane Swonk, chief economist at Grant Thornton.
“What many hoped was a sprint turned into a pandemic marathon with the finish line a mirage,” Swonk said. “The risk of a political misstep and an untimely end to this economic cycle is increasing.”
(Reporting by Lindsay Dunsmuir; Additional reporting by Howard Schneider; Editing by Dan Burns and Paul Simao)
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