I have been of the view that the Fed would announce a tapering of their Treasury purchases at the upcoming (September 18) policy window. I still hold that view — but with much less conviction. The fact is that the labour market appears to have softened in a meaningful way over the past few months.
While it’s true that the increase in non-farm payrolls was decent (+169k v. mkt whispers of 200k), it’s also true that the size and direction of revisions (-16k to 172k for June, and -58k to 104k for July) suggest that the labour market may be a little more flaky than the headline jobs number suggests.
The much commented upon decrease in the unemployment rate was for bad reasons …
Folks have given up looking for work …
And fewer jobs. The household survey (from which the unemployment rate is drawn) actually showed a 115k drop in employment. The household survey is noisy, so that will happen from time to time, but there’s now a clear downtrend from ~200k/month to ~150k/m.
This downtrend is notable in the non-farm payrolls survey as well, with the gap to jobs growth of 200k/m (what i’d taken as a necessary condition for ending QE3) now widening.
Notwithstanding the healthy increase in retail employment, the cyclical sectors are looking weak. Employment growth in construction employment has stalled, and even with a decent gain in August (+14k) the prior weakness (JUne -7k, July -16k) is weighing the sector down.
Temporary employment continues to grow, but there’s a hint of roll over there as well – which probably reflects the leading edge of the restraining impact of higher rates.
There is only one part of the report which i can see which suggests a case for tightening monetary policy — that is the increase in wages. Wages, however, are a lagging indicator of the labour market’s state — so the strength we’re seeing now is more a reflection of how things were a few quarters back.
Still, if the Fed was worried about very low PCE inflation, it would take a lot of comfort from the fact that wage inflation is finally picking up once again.
So can the Fed taper with this data? Yes, they probably can — but i would think that it’ll be small (maximum 10bn/m), and that it’ll be accompanied by changes to their forward guidance that show they don’t expect to raise the funds rate very quickly. I expect them to add something about defending their inflation target from the low side (a change that started last meeting, to get Bullard on side).
Note that this will be the first meeting where we see the FOMC’s forecasts for 2016 — including the funds rate dots. I am guessing that the median vote will have a forecast funds rate around 2% for the end of 2016, which is similar to what the Eurodollars currently imply.