Fed Seen Paring QE to $75 Billion Pace This Month, Survey Shows

A government report today showing job growth was weaker than forecast hasn’t derailed economists’ expectations that the Federal Reserve this month will taper its monthly bond buying by $10 billion, to $75 billion.

Chairman Ben S. Bernanke and his colleagues will reduce Treasury purchases to $35 billion from $45 billion while maintaining mortgage-bond buying at $40 billion, according to the median of 34 responses today in a Bloomberg News survey of economists. That pace was unchanged from an Aug. 9-13 poll, as was a projection that the program will end in June.

Today’s Labor Department report showed employers added 169,000 workers to payrolls in August, less than the 180,000 forecast by economists in a Bloomberg survey, and July’s growth was revised down to an 13-month low of 104,000. That won’t stop the Fed from making the first reduction in purchases at the Sept. 17-18 meeting, said Dana Saporta, an economist at Credit Suisse Group AG in New York.

“The disappointing employment report makes it a tougher call,” said Saporta, who estimates a cut to $65 billion. “It passes the taper test, albeit not with flying colors, and it’s good enough to keep the taper as the most likely scenario.”

Today’s jobs report, the last one Fed officials will see before they meet, also showed the jobless rate unexpectedly declined as more people left the labor force. Unemployment dropped to 7.3 percent, the lowest since December 2008, from 7.4 percent. The participation rate declined to 63.2 percent, the lowest since August 1978.

Falling Joblessness

While the unemployment rate “fell for the wrong reasons,” payroll growth wasn’t bleak enough to delay a tapering of bond buying, according to Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut.

“It would have taken a much more radically weak number to change their view,” said Stanley, who expects the Fed to pare monthly purchases of mortgage bonds and Treasuries by $10 billion each. “They still feel like they want to be very accommodative.”

Fed policy makers were “broadly comfortable” with Bernanke’s plan to start reducing purchases if the economy improves, minutes of their July meeting showed. A Bloomberg survey of economists conducted Aug. 9-13 showed 65 percent of respondents predicted a taper will be announced in September.

The Fed has pledged for more than a year to press on with asset purchases until achieving sustainable gains in the labor market. The central bank announced a third round of quantitative easing in September 2012 to reduce longer-term interest rates, stoke economic growth and combat unemployment.

Downward Revisions

Revisions to prior reports subtracted a total of 74,000 jobs from payrolls in June and July. The new figures lowered the 12-month average pace of monthly payroll growth to 183,830, below the 185,330 average as of August 2012.

“Tapering is likely to begin this month, and the report is not weak enough to alter that,” said Tanweer Akram, a senior economist at ING Investment Management in Atlanta. “The U.S. economy continues to add jobs, and that’s the central takeaway from the report. The trend is continuing with gradual improvement like we’ve seen in the past.”

Kansas City Fed President Esther George, who has consistently dissented against additional stimulus, today called for a tapering of $15 billion at this month’s meeting.

“An appropriate next step toward normalizing monetary policy could be to reduce the pace of purchases from $85 billion to something around $70 billion per month,” George said today in prepared remarks for a speech in Omaha, Nebraska. Such a move would be “appropriate” at the next meeting, and future purchases could be split evenly between Treasuries and mortgage-backed securities.

‘Open Mind’

Chicago Fed President Charles Evans, who has consistently supported record stimulus, said today in a speech in Greenville, South Carolina, that the central bank shouldn’t taper until inflation and economic growth pick up. Evans, who votes on FOMC policy this year, told reporters he has an “open mind” on whether to taper buying this month.

Dallas Fed President Richard Fisher and Narayana Kocherlakota of Minneapolis had differing views yesterday, with Fisher saying policy makers must ensure their bond buying doesn’t disrupt financial markets and Kocherlakota calling for more accommodation. Fisher spoke in Dallas and Kocherlakota gave a speech at the University of Wisconsin in La Crosse.

John Williams of San Francisco said in Portland, Oregon, this week that “clearly we are getting closer to meeting our test of substantial improvement in the labor market.”

Lower Yields

The yield on the benchmark 10-year Treasury note has climbed about a percentage point since Bernanke said on May 22 that the central bank could “take a step down in our pace of purchases” in the “next few meetings.” Bernanke said June 19 policy makers may reduce the $85 billion pace this year and halt it altogether by mid-2014.

Yields fell today after breaching 3 percent for the first time in two years after the employment report. The 10-year yield declined 0.09 percentage point to 2.90 percent at 1:28 p.m. in New York. That’s up from 1.93 percent on May 21.

Former Fed Vice Chairman Don Kohn, whom President Barack Obama mentioned as a potential successor to Bernanke, said the central bank is still likely to begin tapering its bond purchases in September, though the odds have changed as a result of today’s disappointing labor report.

Kohn assigned 60 percent odds of a reduction in the pace of bond buying this month, down from 80 percent a few days ago, according to a report from the Potomac Research Group in Washington, where Kohn is a senior economic strategist. Kohn is also a senior fellow at the Brookings Institution in Washington and an external member of the Financial Policy Committee at the Bank of England.

Bill Gross, manager of the world’s biggest bond mutual fund, said the jobs report won’t step the Fed from tapering.

“Bernanke and company are committed to a taper,” Gross, co-founder Pacific Investment Management Co., said in a Bloomberg Radio interview with Tom Keene. “It will be taper lite as opposed to a strong tapering.”

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