UPDATE 1-Fed closes in on November bond taper after jobs report

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October 8 (Businesshala) – The Federal Reserve could begin to ease its support for the economy next month, despite a sharp slowdown in jobs gains last month as the latest US surge in COVID-19 cases eased and began to decline .

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Although employers added just 194,000 jobs in September, a report by the US Department of Labor showed that an upward revision in figures from previous months meant that all reported here that the economy was longer in December than it was pre-pandemic. Half of the job loss has been regained. employment level.

Fed Chairman Jerome Powell said last month that he would only need to see a “decent” September US jobs report to be ready to start in November.

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“I think it barely overcomes Powell’s ‘civilized’ hurdle,” said Bank of the West economist Scott Anderson. “November’s taper announcement is still the most likely path forward for the Fed.”

Others agreed. “The Federal Reserve has made it clear they don’t need a blockbuster job report in November,” said Cathy Lien, managing director of BK Asset Management, and thought the central bank “remains on track.”

Market reaction was muted, with the benchmark S&P 500 flat in early morning trading on Friday, while the dollar was up less than 0.05%. Benchmark 10-year Treasuries, meanwhile, were up over 1.6%.

Some analysts said the jobs report further complicated the Fed’s path forward.

“The Fed was expecting large enough numbers to ease their decision to start tapering last month,” said Northern Trust economist Carl Tannenbaum. “Now, the November 2-3 discussion may be more difficult; And the market will have to deal with some additional uncertainty.

The Fed has been buying $120 billion of Treasury and housing-backed bonds each month since December to stem the economic fallout from the coronavirus pandemic, and promises to do so until “considerable progress” is made toward its targets of 2% inflation. did. and full employment.

A surge in demand from the economy’s reopening since then has pushed prices up. Fed forecasts and others suggest ongoing supply constraints are set to keep inflation above 2% through the end of the year and through 2022.

On the labor market front, the shutdown of the labor market has caused deeper holes in the labor market. In December, the US economy was supporting about 10 million fewer jobs than it was pre-pandemic; As of September, Friday’s report shows, the gap was around 4.97 million.

Once policymakers begin to phase out their bond-buying program, it is unclear how quickly policymakers can move to raise interest rates from their current-zero levels.

Analysts at TD Securities said the weak reading “should dampen some of the enthusiasm for the 2022 rate hike pricing.”

Futures on the federal funds rate, which tracks short-term interest rate expectations, on Friday a quarter-point tightening price by the Federal Reserve until November or December of next year, more or less the same, ahead of the release of the payroll report.

Fed policymakers have said they will not raise rates until the economy reaches full employment, and inflation is on track to stay above 2% for some time.

A broader question is whether COVID-19 cases are declining as in recent weeks, or whether a resurgence in winter has left consumers quite scared and misjudged the recovery.

Another is the trajectory of inflation, which Fed policymakers expect to ease next year, but if not, could force the central bank to make the uncomfortable decision of raising interest rates before the labor market has fully recovered. Is.

And a third is the extent to which the labor market can make up for lost ground.

Fed policymakers in September had expected unemployment to fall to 4.8% by the end of this year, a benchmark that Friday’s report showed it had already reached last month.

Given the volatility in the number of workers participating in the labor market, ‘it is not clear if this is going to stick’, wrote Jefferies economist Anita Markoska in a note.

But for most analysts, and perhaps especially those with no love lost to a ballooning Fed balance sheet that’s $8.5 trillion and counting, the path to taper is clearer than ever.

The Fed, said Rick Ridder, BlackRock’s chief investment officer for global fixed income and head of the BlackRock global allocation investment team, “probably will (and should) continue its plan to reduce excessive liquidity-housing in the near future.”

Reporting by Ann Sapphir, Additional reporting by John McCrank, Stephen Culp, Herb Lash, Anisha Sarkar, David Randall; Editing by Chizu Nomiyama

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