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Fed Signals Jobless Rate Drop Won’t Deter Bond Purchases

New homes are being built at the fastest pace since 2008, stocks are up 12 percent this year and the U.S. jobless rate is the lowest since January 2009.

None of that is enough to satisfy Federal Reserve Chairman Ben S. Bernanke.

The Federal Open Market Committee barely changed its view of the economy yesterday as it stuck to a plan to buy $40 billion of mortgage debt each month to spur growth. Consumer spending has risen “a bit more quickly,” the FOMC said in a statement after its two-day meeting in Washington, while the jobless rate “remains elevated.”

“That underscores how committed this committee is to seeing the unemployment rate get somewhere closer back to normal,” said Ellen Zentner, senior U.S. economist at Nomura Securities International Inc. in New York. “Some tick down in the unemployment rate is not good enough.”

Zentner is among economists who predict the Fed in December will expand its quantitative easing program as it seeks to bring the jobless rate closer to its long-term goal of 5.2 percent to 6 percent and protect the three-year expansion from risks that include fiscal tightening at home and slowing global growth.

Benchmark 10-year Treasury notes and U.S. stocks fell after the statement. The central bank also repeated that a highly accommodative monetary policy will be appropriate “for a considerable time after the economic recovery strengthens” and interest rates are likely to stay near zero “at least through mid-2015.”

December Decision

The FOMC will need to decide by the end of December whether to continue with Treasury purchases after the expiration that month of so-called Operation Twist. Under that program, the central bank swaps about $45 billion each month of short-term debt and buys the same amount of longer-term Treasuries. The Fed by the end of December will have largely exhausted its supply of short-term debt.

Seventy-two percent of 60 economists in an Oct. 18-19 Bloomberg survey said the Fed in January will make up for the end of Operation Twist with monthly purchases of as much as $45 billion in Treasury securities in addition to the mortgage-bond buying announced last month.

Policy makers are next scheduled to meet Dec. 11-12, after the Nov. 6 presidential election that may help decide the course of negotiations over the more than $607 billion in tax increases and spending cuts that are set to take effect early next year unless Congress acts.

Gas Pedal

“If they decided to drop Operation Twist and not purchase those additional amounts of securities, the market would view that as the Fed taking its foot off the gas pedal, which is not a signal the Fed wants to send just yet,” said John Canally, an economist and investment strategist at LPL Financial Corp. in Boston, which oversees about $350 billion in investments.

The unemployment rate dropped to 7.8 percent in September from 8.1 percent in August and 8.3 percent in July. A Labor Department report on Nov. 2 is forecast to show that unemployment rose to 7.9 percent in October and employers added 118,000 workers to payrolls, scant improvement from the prior month’s 114,000 pace that was the slowest in three months.

Progress in the labor market may help determine the size of Treasury purchases that the Fed undertakes once Operation Twist ends, said Nathan Sheets, global head of international economics at Citigroup Inc. and former head of international finance for the Fed.

The Fed may announce monthly purchases ranging from $25 billion to $45 billion, and “the size is likely to be in the upper part of that range if unemployment backs up to 8 percent over the next two months,” Sheets said. If unemployment declines, the central bank will buy securities toward the lower part of the range, he said.

Growth Outlook

Economists also say economic growth will improve to 1.9 percent in the third quarter, up from 1.3 percent in the second quarter. The Commerce Department will make its first estimate of third-quarter gross domestic product tomorrow.

“The Fed’s made it pretty clear that they want to see really substantial improvement in the labor market, not just one or two strong months of better payroll data,” said Scott Brown, chief economist at Raymond James Financial Inc. in St. Petersburg, Florida. “You’d need to see 250,000 jobs a month, month after month.”

The Standard & Poor’s 500 Index fell 0.3 percent yesterday to 1,408.75, while the yield on the 10-year Treasury rose 0.03 percentage point to 1.79 percent.

Concern about the outlook for company earnings has pushed down the S&P 500 3.9 percent from this year’s high on Sept. 14. The benchmark index has risen for the year on speculation central bankers will keep economies expanding.

Bright Spot

Housing has been a bright spot as mortgage rates driven to record lows by the Fed’s asset buying spur demand. Purchases of new homes rose in September to the highest level in more than two years, figures from the Commerce Department showed yesterday.

Sales climbed 5.7 percent to a 389,000 annual pace, the most since April 2010, following a revised 368,000 rate in August. The median estimate of 75 economists surveyed by Bloomberg called for sales to rise to 385,000.

Horsham, Pennsylvania-based Toll Brothers, the largest U.S luxury-home builder, reported a 57 percent increase in orders for the quarter ending in July over the previous year. The S&P Supercomposite Homebuilding Index tracking 11 homebuilders has increased 87 percent this year.

Even as housing has improved, a worsened outlook for global economic growth has weighed on U.S. companies like Microsoft Corp. and Advanced Micro Devices Inc. (AMD) The companies reported quarterly results last week that fell short of analysts’ predictions, as competition from tablets and weak international demand squeezed sales.

-- With assistance from Steve Matthews in Atlanta and Aki Ito in San Francisco. Editors: James L Tyson, Chris Wellisz

To contact the reporters on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net

Jeff Kearns in Washington at jkearns3@bloomberg.net

To contact the editor responsible for this story: Chris Wellisz at cwellisz@bloomberg.net

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