Bernanke Seen Sticking to QE Tapering Plan After Jobs Report
Federal Reserve Chairman Ben S. Bernanke has reason to maintain his plan to start pulling back on bond purchases this year after today’s report showing payrolls growth beat economists’ forecasts.
“These data likely keep the Fed on the taper trail,” Tony Crescenzi, executive vice president at Newport Beach, California-based Pacific Investment Management Co., said today in a radio interview on “Bloomberg Surveillance” with Tom Keene.
Economists at Goldman Sachs Group Inc. and JPMorgan Chase & Co. said the Federal Open Market Committee will begin tapering sooner than they had expected after today’s Labor Department report, which showed employers added 195,000 workers to payrolls for a second month in June. The gain exceeded the median forecast for a 165,000 increase in a Bloomberg survey of economists.
“Coming into today, our call for a December first taper was already probably a little underwater, and after today’s report we are moving to a call for a first reduction in asset purchases at the September FOMC meeting,” Michael Feroli, chief U.S. economist at JPMorgan Chase, wrote in a note to clients.
Treasuries sank, sending the 10-year yield to the highest since August 2011, while the dollar rallied as the report fueled bets the Fed will begin to reduce the bond buying intended to fuel growth and put more Americans back to work. Stocks trimmed early gains.
The rate on the 10-year U.S. note climbed 23 basis points to 2.73 percent as of 4:40 p.m. in New York, and the Dollar Index, which tracks the currency against six major peers, rose 1.4 percent to 84.43. The Standard & Poor’s 500 Index advanced 1 percent to 1,631.89.
“The market’s already priced in the tapering,” Crescenzi said. “The market is pulling forward the date at which it thinks the tapering will turn to no asset purchases.”
A plurality of economists in a June 19-20 Bloomberg survey said the central bank will reduce the pace of its asset purchases at the Sept. 17-18 meeting of the FOMC. In its first move, the Fed will reduce purchases to a monthly pace of $65 billion from the current $85 billion, according to the survey.
Fed officials next meet July 30-31 in Washington, yet they will not update their economic forecasts, and Bernanke isn’t scheduled to hold a press conference after that meeting. By the time of the September meeting, the Labor Department will have published jobs reports for July and August, giving the Fed more information to make a decision.
Today’s report “reinforces the view that the Fed can get the first initial cutback in asset purchases out of the way in September without creating any presumptions about when the phase-out process will end,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey, who projected a gain of 190,000 for June payrolls.
In order for July and August payrolls numbers to derail a September tapering of quantitative easing, “it would have to be really bad, and it would have to be bad in a way that raised doubts about economic activity as a whole,” Crandall said.
Job gains and a rebound in housing are shoring up Americans’ finances and boosting expectations that the economy will gain momentum even after the payroll tax increased and government agencies began to cut spending.
Private payrolls, which don’t include government agencies, increased 202,000 in June after a 207,000 gain the prior month.
Bernanke last month said the central bank may start tapering later this year if economic performance meets the Fed’s expectations.
“If the incoming data are broadly consistent with this forecast, the committee currently anticipates that it would be appropriate to moderate the monthly pace of purchases later this year,” Bernanke said in a June 19 press conference.
Fed Governor Jeremy Stein said officials should consider economic data since the program began last year, rather than looking only at the most recent figures. The FOMC should “be clear that in making a decision in, say, September, it will give primary weight to the large stock of news that has accumulated since the inception of the program,” Stein said in a June 28 speech in New York.
The unemployment rate has fallen to 7.6 percent from 8.1 percent last August, the most recent figure available when the Fed launched the program the following month. Payroll gains in the six months before QE3 averaged 97,000. As of today’s report, monthly job gains averaged 202,000 in the first half of 2013.
Not all economists expected tapering as soon as September before today’s report. Fifteen percent of those surveyed June 19-20 said tapering would come in October, while 28 percent picked the Fed’s December meeting. The remaining 13 percent said the Fed won’t begin reducing purchases until at least next year.
Bernanke said that “when asset purchases ultimately come to an end, the unemployment rate would likely be in the vicinity of 7 percent” which would probably happen around mid-2014.
Today’s report showed no progress toward that goal. The jobless rate remained at 7.6 percent for the second consecutive month. The rate reached 7.6 percent in March for the first time since the end of the last recession.
If the rate doesn’t begin to decline, Fed officials may not end the program as early as Bernanke outlined, said John Silvia, the chief economist at Wells Fargo Securities in Charlotte, North Carolina.
“I just can’t envision them cutting the quantitative easing to zero while the unemployment rate is still hovering above 7 percent,” said Silvia, who forecast the economy would add 185,000 jobs in June.
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