Jobs Report Tees Up a Taper
Market Reaction Shows Investors Believe 'Tapering' Won't Presage Rate Rise
The strong jobs report was seen as good news by investors. For the Federal Reserve, that is good news in itself.
The economy added 203,000 jobs in November, the Labor Department said Friday, about matching the previous month's gain of 200,000 jobs, while the unemployment rate slipped to a five-year low of 7%. The index of aggregate earnings—an early read on income trends—rose 0.7%. Suddenly, any compunction Fed policy makers might have felt over reducing the central bank's bond purchases seems likely to have been swept away.
They will probably still opt to leave the bond-buying program untouched when they meet later this month, but the jobs report clearly sets the stage for them to start tapering at their January meeting—earlier than many economists had been forecasting.
To judge from the action in the Treasury and stock markets, the possibility of any earlier taper wasn't weighing too heavily on investors' minds Friday. The 10-year note barely budged, with the yield rising slightly but staying below 2.9%. Meanwhile, the Dow Jones Industrial Average registered a triple-digit gain.
That is an indication investors have taken to heart the Fed's message that reducing bond purchases shouldn't be taken as a prelude to raising its target on overnight rates. Contrast that to the summer, when investors' fits over tapering led to a rapid rise in interest rates that ended up weighing on the economy.
Considering the inflation backdrop, the date the Fed finally raises its overnight target seems farther away than ever. In a separate report Friday, the Commerce Department said consumer prices were up just 0.7% in October from a year ago. Prices excluding food and energy—the core measure of inflation the Fed watches closely—were up 1.1%. That is well below the central bank's 2% target.
The low pace of inflation is a bit of a puzzle for Fed policy makers, especially in light of the recent improvement in the jobs market. Last December, they predicted core inflation would be up 1.6% to 1.9% in the fourth quarter of 2013 from a year earlier and the unemployment rate would average 7.4% to 7.7%—forecasts that were too high on both counts.
That is probably a sign employment still has a lot more room to grow before the Fed has to worry about inflation pressures and that the threshold of 6.5% it has said the unemployment rate must pass through before it starts raising short-term rates is far too high. Indeed, whenever the Fed decides to scale back its bond purchases, it may also lower the unemployment-rate threshold as a way of further distinguishing tapering from tightening.
Even so, faith in the Fed's commitment to keeping short-term rates low may not have a very long shelf life.
A string of heartening data this week, including the Institute for Supply Management's manufacturing-activity index, November car sales and the Reuters/University of Michigan consumer-sentiment index, as well as the jobs figures, suggest the pace of the economy may be quickening. With the effects of this year's government spending cuts and tax increases waning, that sets the stage for a stronger 2014.
Convincing investors that it won't tighten until it sees the whites of inflation's eyes may soon be harder for the Fed.