Message in a bottleneck?

Key points

  • The disappointing US labour market data last week are read in the wider context of supply-side bottlenecks, which could fuel the debate on tapering. Bottlenecks can be found in the Euro area too, with probably even less immediate bearing on the ECB stance, but on this side of the Atlantic as well the tapering debate has started.

Economic recoveries rarely follow a straight line, and it’s perfectly possible that last week’s disappointing US employment data are a mere statistical accident. Still, it is fueling the already heated debate on the right dosage of the policy stimulus. Indeed, the mediocre pace of job creation in April seems to reflect labor supply issues – while employers hiring intentions were still improving. The generosity of the federal top-ups to the unemployment benefits may make it possible for some individuals to delay their return to employment. Janet Yellen was more focused on childcare issues in her own analysis, since a lot of US schools remain partly closed. Whichever reason is the right one, the supply-side bottlenecks are likely to ease as the sanitary situation continues to normalize and the end of the boost to unemployment benefits looms. An issue though is how much of the additional impact on inflation expectations it may have could be permanent.
In the short run, the April payroll release will help Jay Powell and a majority of the FOMC to keep the “tapering issue” in the icebox, but the debate is likely to continue in the background. Central bankers everywhere will probably follow closely how the market and the economy at large react to the decision by the Bank of Canada and last week the Bank of England to reduce their quantum of purchases.
Bottlenecks have also emerged in the Euro area. Their impact on inflation should be lower than in the US though, given the difference in demand conditions, but the “tapering debate” is also rearing its head at the ECB Governing Council, with one member last week mentioning the possibility to reduce the pace of buying at the June meeting. This is an even more sensitive issue in the Euro area given the memory of the sovereign crisis and the impact QE is having on the supply and demand of government bonds. We note however that the ECB doves are not silent. Olli Rehn is proposing to adopt the Fed’s average inflation targeting which would call for a robust “ordinary QE” programme well after the end of PEPP. The ultimate stance of the ECB remains uncertain at this stage, even if we think that a PEPP deceleration in June already would come too early.
In any case, these “normalization policy” discussions are conditional on dealing with the pandemic first. From this point of view, the latest US developments on the vaccination programme are getting even more concerning, with another significant deceleration last week.

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