QE3 prospects dim following Jan jobs report

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The better than expected Jan employment data placed the unemployment rate at 8.3% — exactly the middle of the 8.2% to 8.5% range that FOMC participants forecast for Q4’12, at their recently concluded Jan meeting.

If data maintains this tone, the fed’s next move will be to upgrade their inflation forecast. It follows that QE3 will move off the Fed’s current agenda (as their inflation forecast will likely be around their 2% target). The zero lower bound remains binding, so it seems likely that the zero rates to 2014 pledge will remain in place at least through the first round of forecast upgrades.

It is not just me making these points – the WSJ’s ace Fed watcher, Jon Hilsenrath, wrote that

A few more months of strong jobs reports like the one released Friday, and the Federal Reserve might need to draw up a new game plan. For now, though, Fed Chairman Ben Bernanke seems unlikely to rewrite his script for the central bank.

The market will not wait a few months before revising its forecasts. It started right after the jobs report. In the US Treasury market, 30yr bonds sold off 12bps, anad 5*30 steepened 6bps.

The most interesting price action was in the EURUSD – previously, it had rallied on strong US data, but (following an initial gap up) it struggled to hold a bid into the NY close. My guess is that folks are reasoning that without QE3 the USD will strengthen.


  1. I think Noah smith is on the money with what he says.

    I will wait to see a trend emerge before jumping up and down from one months data.

  2. Agree with you Ricardo. My $100 isn’t looking too safe. I now wonder whether if I am going down, I will take Lakshman Acuthan down with me. No word (in public) from the ECRI since 8 December. Of course, the recession may start in Q2, which will be too late for me, but if not, then the ECRI will have a major loss of face (and presumably business) on their hands.

    1. It always seemed like a bold call to me – the ECRI i mean.

      Your 100 isn’t lost yet mate – still plenty of time for us both :)

      Sent from my iPad

  3. I see a number of people have missed reading chapter 32 of the GT. I also See Paul Krugman has already nailed this rubbish.

    I do not think citing Cochrane is an aid in any argument about Macro-economics.

    Incidentally Cowen was saying the US would have to live with double digit unemployment for a long time last year. He is nothing but flexible

    1. I was referring to Klein in my link.

      The reality is that these models never worked well.

      I did macro as Keynesian exegesis as an undergrad, and at grad school was surprised to learn that we actually have learnt something since the 40s.

      Some of these guys are smart. Given them a chance.

      Sent from my iPad

  4. I agree on Klein then. He was first class

    some of these people are spouting political lines and are highly ‘flexible’ in their thinking given the circumstances

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