The second month of disappointing employment data is not expected to interrupt the Federal Reserve’s tapering of monthly asset purchases, although Fed watchers say the February report has taken on an even more important role in monetary policy deliberations, especially if it indicates that the labor market rebound is slowing.
The U.S. Bureau of Labor Statistics Friday reported the U.S. economy added a less-than-expected 113,000 jobs in January, while the unemployment rate dropped to 6.6% – edging closer to the Federal Open Market Committee’s 6.5% threshold. December job growth was barely revised up to 75,000 from the tepid 74,000 originally reported. The labor participation rate did tick up to 63.0% from 62.8% in December.
Speaking moments after the report was released, Dallas Federal Reserve Bank President Richard Fisher indicated the report will not be enough to interrupt the central bank’s process of reducing of its monthly bond buying.
In an interview on CNBC, Fisher, who is a voter on the policymaking Federal Open Market Committee this year as well as a vocal opponent of the asset purchase program, said of the Fed’s steering group: “they are not swayed by a single number, these are thoughtful people.”
He maintained his position that the Fed is on “the right course” with its steady reduction of the monthly asset purchases – now down to $65 billion a month after two consecutive $10 billion reductions.
“The sign is right,” he said, “I believe we need to continue this process because the efficacy of it, the effect of it, is wearing very very thin.”
Barclay’s Michael Gapen wrote in a research note that, “On balance, we see the report as indicating that moderate job growth remains in place, which, in our view, will keep the unemployment rate on a downward path and the Fed on a trajectory of further reductions in its asset purchases.”
Gapen added that, “We continue to expect the Fed to taper its asset purchases by $10 billion at each of its meetings through September and take a final $15 billion step down in October to conclude QE3.”
The next FOMC meeting is set for March 18-19, a gathering that will be followed by Janet Yellen’s first news conference as Fed Chair. She will appear on Capitol Hill next week to deliver the semiannual Monetary Policy Report to Congress Tuesday and Thursday.
Still, Gapen said, the mixed employment picture does increase the chances the FOMC will hold off from additional tapering in March, “and we will look closely at the February employment report for further signs that labor market improvement is slowing.”
Jason Schenker, president of Prestige Economics, noted in his review of the jobs numbers that “since the Fed sets its policies based on the unemployment rate, this report is unlikely to derail the tapering of the Fed’s QE program – although the tapering process could be slowed down, if February job gains are also weak.”
Tanweer Akram, senior economist within the Fixed Income division at ING Investment Management, wrote that Fed officials are likely to continue tapering at a measured pace, “but reinforce forward guidance entailing low interest rates for long as they deem that highly accommodative stance of monetary policy will remain appropriate for a considerable time long after the asset purchase program ends.”
The FOMC began the latest round of aggressive bond purchases in September 2012 to bring about a faster improvement in labor market conditions. The fact the unemployment has fallen rapidly even as the Fed continues to buy assets each month led one Fed official to call for a more rapid wind down of the program.
In a speech Wednesday, Philadelphia Fed President Charles Plosser, also a voter on the FOMC this year, said the argument for speeding up the pace of the FOMC’s taper is supported if the economic outlook plays out as he expects, noting that if the unemployment rate continues to drop at its current pace, it will soon reach the 6.5% threshold in the FOMC’s forward guidance for interest rates.
“I would like to see purchases concluded before the unemployment rate reaches the threshold, which is likely during the first half of the year,” Plosser said.
“Although the FOMC has indicated that it doesn’t anticipate raising rates when the economy crosses that threshold, I do believe that we will have complicated our communications if we are still purchasing assets at that point,” he cautioned. “What is the argument for continuing to increase monetary policy accommodation when labor market conditions are improving rapidly, inflation has stabilized, and the outlook is for it to move back to goal?”
Plosser warned that the longer the Fed continues its asset purchases in such an environment, the more likely it is that the central bank will “fall behind the curve” in withdrawing the record amounts of monetary stimulus it has provided.
Prestige’s Schenker agreed the fall in the unemployment rate to 6.6% “is, in many ways, the worst of both worlds, since the terms driving tapering (i.e. the unemployment rate) are conducive to tighter monetary policies, but job gains slowed sharply (likely as a result of the tapering).”
As a result, “Janet Yellen and the FOMC will be watching the February Employment Report closely,” he said.