Monday, January 24

Fed continues to move forward with November tune-up

Policymakers at the Federal Reserve will likely look at the weakening of the US labor market recovery in September and take the first step in removing pandemic stimulus at their meeting next month.

“This doesn’t change the Fed’s phase-down schedule,” said Rubeela Farooqi, chief US economist at High Frequency Economics. “For the Fed’s gradual reduction, it is likely that the standards on both inflation and the labor market have been met. However, that says little about the tightening of policies, which has a much stricter test and has some downtime. ”

The Federal Open Market Committee left interest rates close to zero at its September meeting and said that starting to cut the $ 120 billion in monthly purchases of central bank assets “could be justified soon” if the economy continues to progress. President Jerome Powell told reporters that the process could begin as soon as the Fed meeting on Nov. 2-3 and the FOMC’s “further substantial progress” phase-down test for employment “is almost complete.” .

Nonfarm payrolls rose 194,000 last month, the smallest advance this year and well below expectations, following an upwardly revised increase of 366,000 in August, a Labor Department report showed on Friday. The unemployment rate fell to 4.8%, partly reflecting a decrease in the size of the workforce. Meanwhile, average hourly earnings increased.

What Bloomberg Economics Says …
“Today’s employment report for September, the only one that the Federal Open Market Committee will have for the November meeting, does not inspire confidence in the recovery of the labor market. Still, we expect the Fed to analyze this disappointment, attributing it to temporary weakness due to Covid, and go ahead with a reduction announcement in November. ”

– Anna Wong, Andrew Husby and Eliza Winger (economists)

The Fed may view the report as more positive overall than the number of top payrolls, driven by the previous month’s revisions and seasonal adjustment issues for education workers that may have been a drag, said Roberto Perli, partner at Cornerstone Macro LLC. It also saw the tuning from November.

Furthermore, wage increases and the drop in the unemployment rate could be seen as a sign that there was less slack in the labor market.

“Fed hawks will highlight fairly rapid wage growth as a sign that the labor market continues to tighten,” said Thomas Costerg, senior US economist at Pictet Wealth Management. “The Fed has worked so hard to build consensus on this November tune-up that it will really be hard to stop the train at this stage.”

The FOMC will meet on November 2-3, but the October employment report will not be available by then. If the Fed unexpectedly delayed the cut, the last meeting of the year is December 14-15.

The Fed sees the report as “a warning, not a cataclysmic,” said Diane Swonk, chief economist at Grant Thornton LLP. “The Fed is still down, given the August revisions. It would have taken more than one mistake to prevent the Fed from downsizing. ”

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