It’s becoming increasingly clear that Friday Sept. 6 is D-Day for tapering.
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That’s the day the August jobs report will be released and voices out of the Federal Reserve in recent days have indicated that even decent numbers are likely to prompt the central bank to begin scaling back its $85 billion-a-month bond-purchase program at the Fed’s meeting later that month.
All summer the unified message out of the Fed has conveyed the point that tapering won’t begin until the move is justified by economic data that suggests the U.S. economy is gaining significant momentum.
Not nearly as unified have been opinions within the Fed over whether recent data point toward that momentum.
Fed doves, or those who have long supported strong stimulus programs to spur economic growth, have downplayed recent economic gains in housing and labor markets while arguing in favor of extending bond purchases known as quantitative easing for the foreseeable future.
At the same time Fed hawks, or those who fear massive bond purchases and years of low interest rates will eventually lead to runaway inflation, have pointed to those strengthening markets while pushing to end quantitative easing sooner rather than later.
These divergent views have sent mixed messages to the markets, leading to all manner of confusion. Fed Chairman Ben Bernanke further muddled things in June when he laid out a hypothetical timetable for tapering while simultaneously insisting no firm timetable had been established.
But comments this week from two Fed doves suggest that opinion is coalescing around a September taper.
The August jobs report will almost certainly be the deciding factor.
'Sooner Rather Than Later'
On Wednesday Cleveland Fed Bank President Sandra Pianalto, a long-time supporter of easy-money policies, added her voice to the “sooner rather than later” crowd.
“Employment growth has been stronger than I was expecting, and the unemployment rate today is more than a half a percent lower than I projected it to be last September,” Pianalto said in a speech in Cleveland. “In light of this progress, and if the labor market remains on the stronger path that it has followed since last fall, then I would be prepared to scale back the monthly pace of asset purchases.”
And on Tuesday, Chicago Fed President Charles Evans, a leading dove among the voting members of the Federal Open Market Committee that sets most Fed policy, said the central bank is “quite likely” to start phasing out bond purchases later this year.
When asked by reporters whether that might happen in September, Evans responded, “I clearly would not rule that out.”
The Fed has focused much of its attention in the past year on the stubbornly high unemployment rate. Last September, when the Fed initiated its third round of bond purchases, or QE III, the express purpose was to create jobs by keeping long-term interest rates low and spurring borrowing among businesses that would lead to expansions and job growth.
Since then the unemployment rate has fallen from 7.8% to 7.4% in July, when the economy added 162,000 jobs. The unemployment rate stood at 8.2% a year ago.
Despite the July jobs figures coming in below expectations, Fed members appear increasingly confident that the labor market is gaining the kind of sustained momentum needed if the economy is to eventually stand on its own without Fed stimulus.
The forecast projected by both Bernanke and Evans under a tapering scenario is that if the data maintain their current trajectory, the unemployment rate will fall to about 7% by mid-2014, just as the Fed’s bond purchasing program draws to a close.
The August jobs numbers will provide a much clearer picture of that trajectory. And a much clearer picture of the Fed’s next move.