Fed Seen Set to Taper QE Even as Payroll Gains Trail Forecasts
The Federal Reserve is poised this month to start reducing bond purchases aimed at spurring the labor market, economists said, even after a government report showed employers added fewer jobs in August than forecast.
Payrolls rose by 169,000 last month, a Labor Department report showed yesterday in Washington, and the jobless rate fell to 7.3 percent as people left the workforce. Revisions to prior reports subtracted a total of 74,000 jobs to payrolls in the previous two months, while hours worked and earnings rose.
The jobs report is the last one Fed policy makers will see before their Sept. 17-18 meeting, when they resume a debate on when to pare $85 billion in monthly bond purchases. The increase in employment was probably strong enough to convince central bankers to reduce so-called quantitative easing by about $10 billion a month, said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh.
“Maybe they do this taper lite,” said Hoffman, the top forecaster of private payroll growth for the past two years, according to data compiled by Bloomberg. “The headcount’s weak, but the income earned from wages and longer hours is positive. To me, it’s sort of win one, lose one.”
Hoffman’s forecast is in line with the median estimate in a Bloomberg survey of 34 economists after yesterday’s jobs report showing the Fed is likely to reduce asset purchases to $75 billion this month. The Federal Open Market Committee will slow Treasury purchases to $35 billion from $45 billion while maintaining mortgage-bond buying at $40 billion, according to the survey. That pace was unchanged from an Aug. 9-13 poll.
The gain in payrolls compared with an estimate for an increase of 180,000 in a Bloomberg survey of economists prior to yesterday’s report.
Private employment, which excludes government agencies, climbed 152,000 after a revised gain of 127,000 in July that was weaker than first reported. Company payrolls were also projected to rise by 180,000, the survey showed.
“The disappointing employment report makes it a tougher call” about when to taper, said Dana Saporta, an economist at Credit Suisse Group AG in New York who predicts 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.”
Average hourly earnings rose 0.2 percent to $24.05 in August from the prior month. They increased 2.2 percent over the past 12 months, the most since July 2011.
While some companies are awaiting a pickup in sales before adding to staff, Ford Motor Co. is among those putting more workers on assembly lines as the auto industry surges.
Dearborn, Michigan-based Ford, the second-largest U.S. automaker, this week reported it will boost fourth-quarter production by 7 percent. The company had in August said an additional shift of 1,400 new workers at a factory in Flat Rock, Michigan, will help increase its Fusion sedan capacity.
Employment at factories increased by 14,000 in August following a 16,000 decrease in the previous month. Economists had projected a 5,000 rise. Employment at private service-providers increased less in August than the prior month. Government payrolls rose by 17,000.
The road to employment has taken time for people like 22-year-old Madison Li. She will start a job as an information technology consultant in Atlanta later this month after graduating from Emory University with a double major in economics and Chinese language and literature. Li put out 25 applications over the past year, and did about 15 interviews before getting four job offers.
“I think it is still not easy” for new graduates, Li said. “We still have a lot of very qualified graduates who are unable to find jobs because of the economy. It is a little bit better than a year ago or the year before. I think it is getting better.”
The unemployment rate, which is based on a separate Labor Department survey of households, unexpectedly declined to the lowest level since December 2008. The rate was forecast to be unchanged at 7.4 percent.
The rate was driven lower as the share of working-age people in the labor force declined. The so-called participation rate declined to 63.2 percent, the lowest since August 1978.
While unemployment “fell for the wrong reasons,” payroll growth wasn’t bleak enough to delay a tapering, 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.”
Kansas City Fed President Esther George, who has consistently dissented against additional stimulus, yesterday 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 in a speech in Omaha, Nebraska. She said doing so at the next meeting is “appropriate” and future purchases could be split evenly between Treasuries and mortgage-backed securities.
Chicago Fed President Charles Evans, who has consistently supported record stimulus, said in a speech yesterday 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, later told reporters he has an “open mind” on whether to taper buying this month.
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