Fed Seen Holding to QE Strategy Even as Payrolls Beat ForecastsJoshua Zumbrun, Lorraine Woellert and Jeff Kearns
The Federal Reserve probably won’t alter its strategy for $85 billion in monthly bond purchases even after a 175,000 gain in U.S. hiring last month exceeded economists’ forecasts.
Most economists surveyed before the Labor Department report said they expected the Fed to maintain the pace through the summer and then trim its monthly asset buying to $65 billion starting in September, October or December. Yesterday’s jobs figures probably won’t change their view, said Michael Feroli, a former Fed economist.
“If you went into this jobs report thinking they’ll taper in December, you’re probably still thinking December,” said Feroli, chief U.S. economist for JPMorgan Chase & Co. in New York. “If you were thinking September, you’re probably still thinking September.”
The Federal Open Market Committee has pledged to press on with stimulus until the labor market shows signs of substantial improvement. The commitment prompted investors to closely scrutinize the payroll report for signs the labor market has grown strong enough for Chairman Ben S. Bernanke to begin dialing back stimulus.
Debate among policy makers over when to reduce their unprecedented bond buying has shaken financial markets. Yields on 10-year Treasury notes rose to a one-year high of 2.17 percent yesterday in New York from 2.08 percent on June 6 and as low as 1.63 percent last month. The Standard & Poor’s 500 Index rose 1 percent to 1,638.39.
Bond traders may still be concerned that a reduction in Fed purchases later this year will remove support for Treasury prices, said Michael Gapen, senior U.S. economist and head of U.S. asset allocation strategy at Barclays Plc and a former Fed economist.
The median forecast for job gains in a Bloomberg survey called for an increase of 163,000 in May. The unemployment rate climbed to 7.6 percent from 7.5 percent as a surge in the number of people entering the labor force swamped the number of positions available.
The payroll expansion is “in that gray area where labor markets are improving moderately but the report’s not decisive in one direction or the other,” Gapen said.
Policy makers calling for no pullback in record stimulus can find ammunition from several points in the payroll report beyond the rise in unemployment to 7.6 percent. Average hourly earnings were little changed at $23.89 in May compared with $23.88 in April.
Also, employment at federal agencies excluding the postal service showed a 9,400 decrease, and manufacturing payrolls shrank for a third month, falling 8,000 in May after a 9,000 decrease in April.
Bernanke said at a March 20 press conference that the Fed would adjust its monthly bond buying in a “sensitive way” based on several measures of the labor market, including payrolls, wages and jobless claims.
Bill Gross, manager of the world’s biggest bond fund, said yesterday the Fed probably won’t reduce its asset purchases after the rise in joblessness in May from a four-year low.
The payroll report doesn’t indicate “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.
Policy makers may need to see four months of job growth averaging at least 200,000 to justify reducing the pace of asset purchases, according to Vincent Reinhart, chief U.S. economist at Morgan Stanley in New York and a former director of the Fed’s Division of Monetary Affairs.
“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 bond buying, said Roberto Perli, a partner at Cornerstone Macro LP in Washington.
Boston Fed president Eric Rosengren and Chicago’s Charles Evans, both voting members of the FOMC this year who have consistently supported increased stimulus, have cited job growth of 200,000 as a benchmark for labor-market improvement.
The impact of the Fed’s first move to reduce purchases may be muted if the step is a small one. Economists in the June 4-5 Bloomberg Survey said the Fed will reduce its pace of purchases to $65 billion a month, split between $30 billion in mortgages and $35 billion in Treasuries. That would be a reduction of $10 billion a month in each market.
“Even those who are advocating for tapering are thinking that it could be a pretty small first step to see how it goes,” said Julia Coronado, chief economist for North America at BNP Paribas SA in New York and a former Fed economist, before the jobs numbers. Yesterday’s report led to “no change at all” to her forecast, she said in an e-mail.
Companies are stepping up hiring amid growing confidence demand will rise even in the face of the higher taxes and U.S. government spending cuts that have slowed growth this year.
Among companies hiring workers is Santa Fe Brewing Co., a 30-employee craft beer maker in Santa Fe, New Mexico. The company has hired five full-time workers and one part-time employee this year to help support growing sales in the Southwest. It’s looking to hire three or four part-time employees now, and may add more full-time positions next year, said owner Brian Lock.
“I get the sense the economy is coming back a little bit,” said Lock, 41. “We are definitely on the recovery track. We are seeing more tourists than we have in the past three of four years, and that is a good sign.”
Yesterday’s report showed gains among private employers were broad-based, ranging from retailers and builders to health-care providers and hotels.
“The economy this year is stronger than it has been during the entire recovery so far,” said Harm Bandholz, chief U.S. economist at UniCredit Group in New York and the top forecaster of payrolls gains for the past two years, according to data compiled by Bloomberg. “Companies just need a little bit more confidence that this goes on.”
Among those who have recently found work is Jane Hillerby, 56, who was living in Reno, Nevada, and commuting to San Francisco when she lost her job as a manufacturing consultant in January. With degrees in engineering and business, she was confident she could find work closer to home.
In March she took a job with Ebara Corp., an industrial pump manufacturer with a site in Reno. Her $90,000-a-year salary as a project manager is less than the $130,000 she earned as a consultant, though she doesn’t have to commute to California and the company covers her health insurance.
“I thought I had a pretty good resume but I wasn’t getting anything,” Hillerby said. “It’s tough out there.”