Fed December Taper Odds Double in Survey as Jobs Beat Estimate
The share of economists predicting the Federal Reserve will reduce bond buying in December doubled after a government report showed back-to-back monthly payroll gains of 200,000 or more for the first time in almost a year.
The Federal Open Market Committee will probably begin reducing $85 billion in monthly bond purchases at a Dec. 17-18 meeting, according to 34 percent of economists surveyed yesterday by Bloomberg, an increase from 17 percent in a Nov. 8 survey. In November, 53 percent predicted a tapering in March, compared with 40 percent in yesterday’s poll of 35 economists.
The jobless rate fell to a five-year low of 7 percent last month as payrolls swelled by 203,000 after a revised 200,000 increase in October, the Labor Department said yesterday. The November gain exceeded the 185,000 median forecast of 89 economists surveyed by Bloomberg.
“Clearly the economy is performing far better than the FOMC expected, and there’s no reason not to get started with tapering,” said James Smith, chief economist at Parsec Financial Management Inc. in Asheville, North Carolina, and a former economist at the Fed. He predicts the Fed will reduce monthly purchases to $65 billion in December.
The pickup in hiring -- the biggest gain in three months -- signals that companies are more confident demand will improve, while gains in wages and hours reported yesterday give American workers more reason to spend as holiday shopping gets under way. Stocks rallied on bets the economy is strong enough to withstand a reduction in the Fed’s bond buying.
The Standard & Poor’s 500 Index advanced 1.1 percent to 1,805.09 in New York, extending this year’s rally to 27 percent. The yield on the 10-year Treasury note declined 0.02 percentage point to 2.86 percent.
The payroll report puts the four-month average for gains at 204,000, and the six-month average at 180,000. Chicago Fed President Charles Evans, a supporter of record stimulus who votes on policy this year, said in April he wants gains of 200,000 a month for about six months before tapering. Atlanta’s Dennis Lockhart, who doesn’t vote, said several months of gains exceeding 180,000 would make slowing appropriate.
“The 200,000 number hits you right between the eyes,” said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. “That’s a number that everyone agrees the labor market is showing good-size gains, and the progress they’re making seems to be sustainable if that marker is met, which it was.”
The unemployment rate, derived from a separate Labor Department survey of households rather than employers, was forecast to fall to 7.2 percent. In October, joblessness rose for the first time in five months, reflecting workers furloughed during a federal government shutdown that lasted half the month.
The FOMC has pledged to keep buying bonds until the “outlook for the labor market has improved substantially.” The central bank’s so-called quantitative easing has pushed the Fed’s balance sheet close to $4 trillion this year with purchases of Treasury and mortgage-backed securities.
The payroll and unemployment numbers “are impressive in terms of a stronger economy and the need to exit QE,” Pacific Investment Management Co.’s Bill Gross said yesterday on Bloomberg Radio. He said the odds of a December taper are “at least 50-50 now.”
Other reports yesterday showed an improving labor market is boosting consumer confidence along with the spending that accounts for 70 percent of gross domestic product.
Household purchases climbed 0.3 percent in October after a 0.2 percent increase the prior month, according to Commerce Department figures. The median estimate in a Bloomberg survey of 73 economists called for a 0.2 percent rise.
The Thomson Reuters/University of Michigan preliminary December consumer sentiment index rose to 82.5, the highest in five months, from 75.1 in November. Economists forecast an increase to 76, according to the median estimate in a Bloomberg survey.
The Labor Department’s household survey showed more people were entering the labor force. The so-called participation rate rose to 63 percent in November, the first gain since June. A month earlier it fell to 62.8 percent, the lowest level since March 1978.
Factories took on the most workers since March 2012, employment in construction accelerated and payrolls in transportation and warehousing picked up, yesterday’s figures showed.
Factories added 27,000 jobs, helped by a pickup at automakers, after a 16,000 gain in October. Construction firms took on 17,000 workers.
Average hourly earnings increased by 0.2 percent to $24.15 in November from the prior month, and climbed 2 percent over the past 12 months. The average work week for all workers climbed six minutes to 34.5 hours last month.
Economists in September predicted a taper at the FOMC meeting that month. The committee unexpectedly refrained from a reduction. Policy makers said at that meeting and again in October that they needed more evidence of lasting improvement in the economy and that fiscal policy was restraining growth.
The FOMC cited the drag from fiscal policy in its Oct. 30 statement, after a 16-day government shutdown resulted in the furloughs of as many as 800,000 federal workers. Data since then suggest the damage to the economy was limited.
A report this week showed third-quarter growth was faster than initially estimated as gross domestic product rose at a 3.6 percent annual rate, up from an initial estimate of 2.8 percent and the strongest since the first quarter of 2012.
“What else does the Fed have to see to buy at a slower rate?” said John Ryding, chief economist at RDQ Economics in New York who has worked at the Bank of England and the Federal Reserve Bank of New York. “If not now, when?’
Ryding said yesterday’s employment report didn’t change his projection that the Fed will slow purchases to $70 billion a month at the next gathering.
‘‘If it was a close call in September, all of the things that made them tip to the side of not going have been largely cleared up,” he said.
Economists at BNP Paribas SA in New York stuck to their forecast that a reduction won’t come until the March meeting.
Policy makers probably will want to see more reports and broader measures that confirm the strength of recent reports, economists led by Julia Coronado wrote in a note yesterday. “We think the Fed holds its fire in December and awaits more data.”
The last consecutive payroll reports exceeding 200,000 were in November and December 2012. The average gain since the June 2009 end of the 18-month recession is 117,000.
“We’re back to those numbers of 200,000 a month basically that they said they wanted to see to justify tapering,” Diane Swonk, who helps oversee $81.2 billion as chief economist at Mesirow Financial Inc. in Chicago, said in a Bloomberg Television interview. “It’s not the only number out there but it’s a big number and it’s really important.”
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