Fed Seen Staying Course on Tapering Even Amid Weaker Job Growth

The weakest back-to-back gains in U.S. payrolls in three years are unlikely to prompt the Federal Reserve to shelve its strategy of gradually trimming bond purchases, according to economists.

Hiring rose by 113,000 in January, less than the 180,000 gain that was the median forecast of economists surveyed by Bloomberg and following a 75,000 increase the prior month, Labor Department data showed yesterday in Washington. Unemployment fell to 6.6 percent, the least since October 2008, from 6.7 percent in December.

“This is a lackluster report, but it’s not enough to take the Fed out of autopilot on tapering,” said Thomas Costerg, an economist at Standard Chartered Bank in New York. “They’ll take a broader look at the economy, not just at payrolls,” he said, as a “broad consensus” at the Fed favors cutting monthly bond buying by $10 billion at each policy meeting.

Janet Yellen is unlikely to signal any shift in the tapering strategy when she testifies to lawmakers next week in her first public comments as Fed chairman, according to Dean Maki, the New York-based chief U.S. economist for Barclays Plc. 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,” said Maki, a former Fed economist. A range of employment data indicate the “overall picture is still one of moderate growth.”

U.S. stocks rallied as the drop in the jobless rate suggested the economy can weather a reduction in stimulus. The Standard & Poor’s 500 Index rose 1.3 percent to 1,797.02, while the yield on the benchmark 10-year Treasury note declined 0.02 percentage point to 2.68 percent.

Construction, Retailing

Retailers and government agencies cut payrolls last month by the most in more than a year, yesterday’s report showed, while construction firms and manufacturers boosted employment, contributing to more than half the advance.

Private employment, which excludes government agencies, rose by 142,000 in January after increasing 89,000 the prior month. The Bloomberg survey median called for a 185,000 gain.

Shari Adams is among those looking for work after being dismissed in July 2013 from her job as a controller at a nonprofit firm.

“It’s a roller-coaster ride,” the 45-year-old from Richmond, Virginia, said. “There are definitely more opportunities” for work. “There’s also a lot of competition.”

Department stores announced workforce reductions last month after the holiday-shopping season. Macy’s Inc. said it would eliminate about 2,500 jobs and close five stores, while J.C. Penney Co. plans to cut about 2,000 positions and shutter 33 locations.

Range of Data

Fed officials will consider a range of labor-market data as they consider whether to keep cutting bond purchases at the same pace, Roberto Perli, a partner at Cornerstone Macro LP in Washington, said after the jobs report.

“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.

A separate Labor Department report on Feb. 6 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.

Jobless Claims

The three-month average of payrolls gains, the jobless rate and claims data 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.

The Fed announced in December that it would start paring stimulus by cutting monthly bond purchases by $10 billion per month, and it decided on another reduction of the same size in January, to $65 billion. The central bank 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” the unemployment rate declines below 6.5 percent.

The Fed’s decision in December to start tapering 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.

Just Started

“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, it will have an additional month of economic data, including the jobs report for February.

“If payrolls similarly disappoint in February, a pause in tapering will almost certainly be on the table at the next meeting,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York and a former Fed economist, wrote in a note. For now, with unemployment declining, “concerns about a broader labor market swoon may be premature.”

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