The Fed Wants Out, But Is the Labor Market Ready?

Money

Source: http://www.flickr.com/photos/zieak/

The taper has finally come, and if you ask economists, that means the end is nigh for quantitative easing. Speaking with Tom Keene on “Bloomberg Surveillance” on Friday morning, PIMCO Bill Gross echoed the view of many market watchers when he said, “I do believe that by the end of 2014, the Fed wants to be out.”

Beginning this January, the U.S. Federal Reserve will reduce the rate at which it is purchasing assets by $10 billion per month to $75 billion per month, effectively lowering the economy’s prescription of monetary stimulus. The decision was made at the December meeting of the Federal Open Market Committee, the arm of the Fed responsible for open market operations such as quantitative easing.

Now that the ball is rolling, economists expect the FOMC to wrap the taper up over the course of its next seven meetings, or in about one calendar year. This timeline was the consensus of 41 economists polled by Bloomberg at the end of December, and is consistent with projections released by the FOMC, which put the appropriate date of policy firming — raising the target federal funds rate from the zero bound — in 2015. Gross, for his part, suggests that the target federal funds rate will remain at the zero bound throughout 2015, giving the bond market time to sort itself out while keeping short-term rates low.

According to the FOMC, the decision to taper was made “in light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions.” At the same time, the Fed edited its unemployment target, stating that a near-zero federal funds rate may remain appropriate even if headline unemployment falls below 6.5 percent. Previously, the Fed had used achieving 6.5 percent unemployment as a target.

The revision was timely, given Friday’s labor market report. The U.S. Bureau of Labor Statistics reported that the headline unemployment rate fell to 6.7 percent in December, its lowest level since the crisis. At a glance, this is good news — but reality isn’t quite as rosy as the headline picture suggests. Just 74,000 payrolls were added in December, according to the BLS, a miserably low figure and well below the 200,000 expected by economists.

What’s more, the labor force participation rate declined by 0.2 percentage points to 62.8 percent, well below pre-crisis levels of about 66 percent. The number of unemployed people declined by 490,000 people, but few of them were actually put on payrolls. The data suggests that the labor market is not actually as healthy as the headline number would lead people to believe.

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