Fed Still Seen Tapering in March Even as Job Growth Picks Up

Economists still forecast the Federal Reserve will delay tapering asset purchases until March even after a report yesterday showed employers added more jobs than forecast in October.

Policy makers will pare the monthly pace of bond buying to $70 billion at their March 18-19 meeting from the current pace of $85 billion, according to the median of 32 economist estimates in a Bloomberg News survey yesterday. The median forecast in an Oct. 17-18 survey of 40 economists also called for a reduction to $70 billion in March.

The Federal Open Market Committee voted Oct. 30 to keep the pace unchanged, saying it needs more evidence of improvement in the economy. The jobs report probably isn’t enough to convince policy makers that it’s time to start tapering the quantitative easing program, said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut.

The strength of the payroll report “at least brings December back on the table, but in the end they’re not going to have enough evidence to pull the trigger,” said Stanley, a former Richmond Fed researcher. “Part of the reason they keep putting off any pullback in accommodation is that they’re continually disappointed in the outlook.”

Employers added 204,000 workers in October, according to the Labor Department report, compared with a median estimate of a 120,000 gain in a Bloomberg survey of economists. Revisions increased the job gains for the prior two months by a total of 60,000. The jobless rate rose to 7.3 percent from almost a five-year low of 7.2 percent.

March Prediction

The report “makes us more comfortable with our March call,” said Laura Rosner, a U.S. economist at BNP Paribas SA in New York and a former researcher at the New York Fed. “This is the progress we need to be seeing in order to be confident by March of next year. We’ll need to see a couple more reports to make sure the strengthening in the labor market sticks.”

Fourteen of 32 economists surveyed yesterday said they expect the first reduction of bond purchases in March, while nine projected January and five forecast December. The remainder said they expect tapering to begin in April or June.

Economists at JPMorgan Chase & Co. moved up their estimate for the first taper to January from March or April after the jobs report, which lifted the average payrolls gain for the last three months to 202,000.

‘Comfortable Enough’

“Now it seems like the hiring is holding up even though overall economic growth is still pretty lackluster,” said Robert Mellman, a senior U.S. economist at JPMorgan in New York. “If they just get a few more reports confirming that what they see in the latest data is actually happening they’ll be comfortable enough that they can start to taper.”

The economists’ forecasts for a March taper contrast with investor expectations for an earlier reduction in QE. Treasuries fell the most in four months yesterday, the dollar strengthened and stocks rallied.

The yield on the 10-year note jumped 15 basis points to 2.75 percent. The Standard & Poor’s 500 Index rose 1.3 percent and the Dow Jones Industrial Average rallied 167.8 points to a record 15,761.78. The dollar climbed against most of its major peers.

Payrolls increased at manufacturers by the most since February. Retailers added about twice as many workers as the month before, and leisure and hospitality employment was the strongest in six months.

Factories added 19,000 workers in October. Industries adding factory jobs in October ranged from motor vehicles and fabricated metals to furniture and food processing.

Holiday Shopping

Retailers boosting hiring ahead of the holiday shopping season include Amazon.com Inc. The world’s largest online retailer is creating more than 70,000 full-time seasonal jobs and expects to convert “thousands” of those positions to permanent roles after the season ends as it did in 2012, according to a statement.

The jobs report, delayed by the October partial federal government shutdown that furloughed as many as 800,000 federal workers, was originally slated for Nov. 1. The Labor Department, in its survey of 60,000 households, extrapolated the effects of the impasse to arrive at the unemployment rate.

“The government shutdown really didn’t have a material impact on employment,” said Brian Jones, senior U.S. economist at Societe Generale in New York, whose forecast for a payroll gain of 175,000 was the highest in the Bloomberg survey. “The labor market is actually quite healthy, regardless of what people may think. The economy is doing better.”

Third Round

The FOMC began its third round of quantitative easing in September 2012 with monthly purchases of $40 billion in mortgage-backed securities. It added $45 billion in monthly Treasury purchases in December.

Policy makers unexpectedly refrained from tapering at their meeting in September. Economists had forecast the FOMC would dial down monthly purchases by $5 billion at that gathering.

Atlanta Fed President Dennis Lockhart, who doesn’t have a vote on the FOMC this year, said yesterday policy makers will consider reducing bond buying at their Dec. 17-18 meeting.

“I would not take off the table at least consideration at that time,” Lockhart told reporters in Oxford, Mississippi, in response to a question. “The question of changing the mix of accommodative tools ought to be on the table at every meeting for the foreseeable future.”

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