Fed Tapering Seen on Course Even as Job Growth Trails ForecastsJoshua Zumbrun
Two months of weak payrolls growth are unlikely to knock the Federal Reserve off its path of gradual reductions in bond purchases, according to former Fed economists.
“The bar for slowing the taper is a lot higher than this,” Roberto Perli, a partner at Cornerstone Macro LP in Washington, said today after a government report showed payrolls rose by 113,000 in January after a gain of 75,000 the month before.
Janet Yellen testifies to lawmakers next week in her first public comments as Fed chairman, and she’s unlikely to signal any shift in the tapering strategy, said Dean Maki, chief U.S. economist at Barclays Plc in New York. Yellen helped her predecessor Ben S. Bernanke develop the strategy, intended to avoid jarring markets and to give policy makers time to evaluate the state of the job market.
“The message will be one of continuity,” Maki said.
Policy makers will look at other gauges of labor-market health, including the jobless rate, as they consider whether to maintain the pace of tapering, the economists said. Today’s report showed that unemployment fell to 6.6 percent in January, the lowest rate since October 2008.
“You need to see a lot of weakness not just in the employment report but across all the other labor-market indicators that right now you don’t see,” said Perli, who formerly worked at the Fed’s monetary affairs division.
Maki said a range of labor-market data indicate that the “overall picture is still one of moderate growth.”
The Fed started paring stimulus in December, cutting monthly bond purchases by $10 billion per month, and reduced them by the same amount in January, to $65 billion. The Fed has said it will keep buying bonds until the outlook for the labor market has “improved substantially.”
The Fed also repeated that the benchmark interest rate is likely to be kept near zero until “well past the time” that the unemployment rate declines below 6.5 percent.
Last month’s drop in the jobless rate occurred even as more people entered the labor force in search of work. That was a contrast to December, when people dropped out of the labor force.
A separate Labor Department report yesterday showed that initial claims for unemployment benefits fell to 331,000 last week from 351,000 the week before. Jobless claims have averaged 341,000 a week for the past year.
Over the past three months, payroll gains have averaged 154,000, compared with an average of 193,500 for all of last year. December’s report was in part influenced by unusually cold weather.
“The three-month average on payrolls is still decent, the unemployment rate continues to move lower and jobless claims suggest labor momentum is holding up,” Joseph LaVorgna, the chief U.S. economist at Deutsche Bank Securities Inc. and a former New York Fed economist, said in a note. “Consequently, we expect the Fed to continue tapering QE at a $10-billion-per-meeting pace.”
Federal Reserve Bank of Dallas President Richard Fisher, who votes on policy this year, said in an interview on CNBC today that policy makers are “not swayed by a single number” such as the January payrolls figure.
The Fed’s decision to start tapering in December cited improvement in the labor market. “The Committee will likely reduce the pace of asset purchases in further measured steps at future meetings,” the Fed said.
“They will be unwilling to reverse a direction they just started,” said Guy Haselmann, an interest-rate strategist at Bank of Nova Scotia in New York, one of 21 primary dealers that trade with the U.S. central bank.
The Federal Open Market Committee doesn’t meet again until March 18-19. By then, they will have an additional month of economic data, including the jobs report for February.
“The Fed will be able to sort through the February figures and decide how much is trend and how much is volatility,” Maki said. “That’s critical to deciding how policy should respond.”
Another weak report next month could be enough for the Fed to consider putting tapering on hold, according to Michael Feroli, the chief U.S. economist at JPMorgan Chase & Co. and a former Fed economist.
“If payrolls similarly disappoint in February a pause in tapering will almost certainly be on the table at the next meeting,” Feroli wrote in a note. For now, with the unemployment rate declining, “concerns about a broader labor market swoon may be premature.”