Fed Hurdle of 4 Straight 200,000 Payrolls Sets Bernanke View
The Federal Reserve says it will keep buying bonds until the labor market has “improved substantially,” without defining the phrase. Officials may have adopted a threshold nevertheless, say two former Fed economists.
Chairman Ben S. Bernanke needs to see four months of job growth averaging at least 200,000 to justify reducing the pace of asset purchases, according to Vincent Reinhart, a former director of the Fed’s Division of Monetary Affairs. Roberto Perli, a former researcher in the division, said the central bank would need to see that pace “through the summer.”
“They would see that as confirmation that the economy is on a self-sustaining trajectory and they would thus be confident that they could reduce the pace” of quantitative easing, said Perli, a partner at Cornerstone Macro LP in Washington.
The figure helps provide clarity as investors seek to determine when the Fed will start to pare back the $85 billion in monthly bond purchases that kept borrowing costs low and fueled a stock-market rally. Yields on 10-year Treasury notes are near a one-year high on speculation tapering is imminent.
The May payrolls increase fell short of 200,000. The Labor Department said today that payrolls rose 175,000 last month, while April’s gain was revised lower to 149,000. The jobless rate rose to 7.6 percent from 7.5 percent as more people entered the workforce.
Bill Gross, manager of the world’s biggest bond fund, said the Fed probably won’t reduce its asset purchases after the rise in joblessness last month from a four-year low.
“I don’t think today’s report says anything about tapering at all with unemployment going higher and metrics in terms of the work week and wages being very dour,” Gross, founder of Pacific Investment Management Co., said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Mike McKee. Bernanke “won’t taper. But I think ultimately in order to get a more normal economy, the Fed has got to move interest rates up to more normal levels.”
Boston Fed president Eric Rosengren and Chicago’s Charles Evans, both voting members of the Federal Open Market Committee this year who have consistently supported increased stimulus, have cited job growth of 200,000 as a benchmark for labor-market improvement.
Some economists say the Fed’s threshold for tapering may be lower. Today’s job gain “is probably good enough, but they need more evidence that this is sustainable,” said Harm Bandholz, chief U.S. economist at UniCredit Group in New York and the top payrolls forecaster for the past two years, according to data compiled by Bloomberg. “If we see a couple more months like May, then I think tapering in September is still possible.”
U.S. stocks and Treasury yields advanced after the jobs report. The Standard & Poor’s 500 Index (SPX) climbed 1 percent to 1,638.64 at 1:08 p.m. in New York. The 10-year Treasury yield increased seven basis points, or 0.07 percentage point, to 2.15 percent.
Reinhart, chief U.S. economist at Morgan Stanley in New York, says investors should pay attention to the 200,000 figure, calling it “a good rule of thumb.” Fed officials “probably need four months of that on average to justify tapering balance-sheet expansion,” he said June 3 in a Bloomberg Television interview with Tom Keene.
Reinhart wrote in a May 28 note to clients he doesn’t expect the Fed to reach that hurdle until December because the economy is likely to encounter a “soft patch.”
“Historically, 200-plus was typically the kind of pace you would see in a more normal recovery,” said Michael Hanson, senior U.S. economist for Bank of America Corp. in New York and a former Fed economist. “It’s a quantifiable metric that we’ve turned the corner in the labor market. It looks much more like recovery.”
With inflation below the Fed’s 2 percent goal, Bernanke is free to focus on the other half of the central bank’s mandate from Congress -- full employment, according to Ward McCarthy, chief financial economist at Jefferies LLC in New York and a former Fed economist. Prices rose 0.7 percent in April from a year earlier, according to the personal consumption expenditures index, the measure watched by the Fed.
“Inflation is the Rodney Dangerfield of the dual mandate,” McCarthy said. “If you generate strong job growth, that’s really fundamental to a stronger economy because over two-thirds of our economy is related to consumer spending.”
Evans last month said he’d like to see monthly employment growth of 200,000 or more for at least six months.
“If I had high confidence that this was going to be maintained over the next six months and beyond, I would be quite amenable to discussions about adjusting the flow of purchases downward,” Evans said May 20 in Chicago. In 2011, he dissented twice from FOMC decisions leaving policy unchanged because he favored adding stimulus.
Rosengren, in a May 29 speech in Minneapolis, said “significant accommodation remains appropriate at this time.” Responding to a question, he said he wants to see consistent monthly payrolls increases exceeding 200,000.
Stocks and Treasuries have declined since May 22, when Bernanke told the Joint Economic Committee of Congress that the Fed “could” scale back the pace of asset purchases in the “next few meetings” if the labor market improves and the Fed is convinced the gains are sustainable.
“If we see continued improvement and we have confidence that that is going to be sustained, then we could in -- in the next few meetings -- we could take a step down in our pace of purchases,” Bernanke, 59, said in response to a question.
The yield on the 10-year Treasury note rose as high as 2.17 percent from 1.93 percent the day before Bernanke spoke. The S&P 500 has slumped 1.9 percent since May 21.
“Markets may have over-interpreted or put a little too much spin on it, suggesting that the Fed may be ready sooner to taper,” said Josh Feinman, the global chief economist for Deutsche Asset & Wealth Management, which oversees $400 billion.
Since Bernanke’s testimony, other central bank officials, including Kansas City Fed President Esther George, have called for reducing the pace of asset purchases.
George, who votes on policy this year, said in a June 4 speech that average monthly employment growth of 200,000 over the past six months is “more than sufficient” to keep up with population growth. The Dallas Fed’s Richard Fisher, who doesn’t have a vote, has also said he favors paring purchases.
Atlanta’s Dennis Lockhart said officials are committed to record stimulus even as divergent views on when to start paring back bond purchases create a “mixed message” to investors.
“To the extent that the markets are seeing mixed messages, it simply reflects the debate that’s going on among the colleagues on the Federal Open Market Committee,” Lockhart said in a June 3 interview with Bloomberg Television. He said a reduction in the pace of purchases wouldn’t be a “major policy shift.”
While monthly job growth of 200,000 is a hurdle for tapering, it may not be sufficient. Fed officials also need to be confident that labor-market gains can be sustained, said Former Richmond Fed President J. Alfred Broaddus Jr.
“What they’re looking for is persistence in a trend, so it’s no guarantee but it raises the probability in anyone’s mind that it’s not just a blip,” he said.
Blips have bedeviled the Fed before. The four-month average for payroll growth climbed to an almost six-year high of 254,000 in March 2012, then fell by more than half to 119,000 by July. Earlier instances of the average rising above 200,000 were followed by similar reversals in 2010 and 2011.
Policy makers “take a more holistic view” that incorporates a wider range of economic gauges, according to Feinman, a former Fed senior economist who is based in New York.
Bernanke said at a March 20 press conference that before curbing purchases, the FOMC seeks “sustained improvement across a range of indicators” including payrolls, wages, claims for unemployment insurance, quit rates and economic growth.
“It’s ultimately a broader-based assessment of the labor market,” Feinman said. “Payrolls are obviously a very important part of that, but they’re not the only part. The sustainability is very important too.”
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