Fed will start easing off its tapering in March at earliest, market watchers say
The weaker-than-expected September employment report released Tuesday should place any speculation over a reduction in quantitative easing squarely on the back burner for at least the rest of the year.
“The labor market participation rate is now down around 63%, and the improvement in the employment picture is slowing,” said Steve Van Order, fixed-income strategist at Calvert Investments.
His assessment is in line with consensus estimates that the Federal Reserve could start reducing its five-plus-year QE program in March. He added, however, “I wouldn't be surprised if they waited even longer.”
Tuesday's jobs report showed that U.S. employers added just 148,000 jobs last month, below expectations for 180,000 jobs. There were 193,000 jobs added in August.
The latest employment data aren't expected to change the 7.3% unemployment rate.
“When it comes to Fed tapering, you have to look at it from the perspective that it is going to be data-dependent, and the Fed is not happy with the pace of growth,” said Wilmer Stith, co-manager of the Wilmington Broad Market Bond Fund (ARKIX).
The weakening employment data are used by the Fed to address its dual mandate of lowering unemployment and managing inflation.
Beyond the disappointing employment data, the Fed is factoring in the fact that interest rates have been rising since Chairman Ben S. Bernanke suggested in May that it would start to reduce its pace of bond purchases last month, Mr. Stith said.
“The Fed was surprised at how much conditions tightened over the course of the late summer,” he said.
For example, the yield on the 10-year Treasury bond is up nearly 100 basis points from where it was in late May.
The other factor delaying the start of tapering is continuing political uncertainty in Washington, Mr. Stith said.
“True to form, Congress could not resolve anything with the president and we saw a 16-day government shutdown,” he said. “That will not be helping economic growth.”
There also is an additional factor: Janet Yellen's nomination by President Barack Obama to replace Mr. Bernanke as chairman of the Federal Reserve Board of Governors.
Ms. Yellen, who could take over before March, is considered to have dovish leanings, meaning that she is likely to support an extension of the monthly purchase of $85 billion in bonds.
“If she decides to start tapering in March, that's probably OK, but if she waits until the end of 2014 to start tapering, that is sowing the seeds for the next credit bubble,” said Doug Cote, chief investment strategist at ING U.S. Investment Management.
Despite the state of unemployment and inflation, he thinks that the U.S. economy is strong enough to start standing on its own without the support of what he calls “QE infinity.”
“We have record corporate profits, there is a manufacturing resurgence in this country and consumers are spending $125 billion a month,” Mr. Cote said. “Risk is substantially diminished, so it is incongruous that we can't start tapering.”
With regard to tapering, Mr. Cote thinks that the Fed is more focused on preventing a currency market meltdown originating in Asia and India.
“In May, when the Fed announced it might taper, U.S. interest rates started rising as the speculative money in Asia and India started moving back to the U.S.,” he said. “Those currencies and equity markets started plummeting, and it reminded me of the 1997 Asian currency crisis where hot money fled the market.”
Even with the S&P 500 up more than 24% this year on the heels of a 16% gain last year, Mr. Cote said that the Fed is pushing too hard and too long on the quantitative-easing pedal.
“I like to see markets going up, but not if it's creating the next black-swan event, and this speculative search for yield sows the seeds for the next black swan. Bursting of bubbles is what brought us to the 2008 crisis, and quantitative easing is not a free lunch," Mr. Cote said.
"Unfortunately, we didn't taper in September," said Thomas Meyer, chief executive of Meyer Capital Group.
"It was a perfect scenario because the market was ready, but now we will basically recalibrate, and we will go through the same thing we went through in May in the next few months," he said.
"Fixed income is now rallying, but this allows you to reallocate once again. And get ready for the same scenario of the threat of tapering except the markets will be at higher levels," Mr. Meyer said.
"My guess is as good as anyone on when they will decided to taper, but it's likely to be slower than originally anticipated," said Harold Evensky, founder and president of Evensky & Katz Wealth Management.
"That sort of news doesn't influence anything we're doing anyway. We're long term," Mr. Evensky said.
The S&P 500 rose 0.57% to close at 1,754.67 today, and the yield on the 10-year fell 3.7%.
