Fed Closes in on Bond Exit

U.S. News

Fed Closes In on Bond Exit

Strong Jobs Report Moves Central Bank Nearer to Paring Purchases; Dow Soars

Jon Hilsenrath

Dec. 6, 2013 7:15 p.m. ET

SOME OBSERVATIONS: 1) THE NUMBER WAS ONLY SLIGHTLY BETTER THAN EXPECTED 2) EXCERPT FROM ARTICLE: "The jobless rate fell from 7.2% to 7% during the period effectively because people stopped looking for jobs and removed themselves from the ranks of people counted as unemployed." AND 3) THE GDP REPORT FROM 12/5 SHOWED A LARGE INCREASE IN INVENTORIES WHICH MAY SLOW GROWTH THIS QUARTER. BEYOND THAT HOWEVER, IT APPEARS THAT MARKETS ARE MORE PREPARED THAN EVER FOR A TAPER - TIMING IS EVERYTHING! ENJOY!

Federal Reserve officials are closer to winding down their controversial $85 billion-a-month bond-purchase program, possibly as early as December, in the wake of Friday's encouraging jobs report.

Fed Chairman Ben Bernanke will have to build consensus among officials about how soon to pull back on a program that has been the center of market attention for months and whose effectiveness isn't wholly clear. Many are getting more comfortable with starting a delicate process of winding the program down, though disagreements about timing and strategy could emerge, according to public comments and interviews with officials.

Fed officials hesitated to begin scaling back the bond-buying program in September when the job market appeared weaker and a fiscal standoff in Washington loomed, or in October when they met after a 16-day government shutdown Reuters

The Fed's next policy meeting is Dec. 17-18 and a pullback, or tapering, is on the table, though some might want to wait until January or even later to see signs the recent strength in economic growth and hiring will be sustained. On Tuesday, officials go into a "blackout" period in which they stop speaking publicly and begin behind-the-scenes negotiations about what to do at the policy gathering.

One important consideration: Are investors prepared for a move? Talk of pulling back earlier this year jarred stock and credit markets. On Friday they seemed to take the prospect of a pullback in stride.

The Dow Jones Industrial Average leapt 198.69 points, or 1.3%, to 16020.20, the largest rise in seven weeks. Friday's gain snapped a five-day losing streak and put stocks within striking distance of all-time highs. The yield on the 10-year Treasury note barely rose, another sign that financial markets weren't rattled.

"Good news is good news today," said Katie Nixon, chief investment officer at Northern Trust Wealth Management, which manages about $212 billion.

U.S. Employers Gain Confidence to Hire

On some days in recent months, positive economic news spurred selloffs as investors fretted whether the market could sustain its gains without Fed support. The sharp rise in stocks Friday shows that the Fed is having some success reassuring investors that it will maintain easy-money policies for years to come.

"I think we're making a lot of progress," San Francisco Fed President John Williams said in an interview with The Wall Street Journal before the release of Friday's data. "I just want to be confident that we are moving steadily closer to our objectives and our goals."

Fed officials hesitated to begin scaling back the program in September when the job market appeared weaker and a fiscal standoff in Washington loomed, or in October when they met after a 16-day government shutdown.

However, the November employment report was the latest in a batch of recent indicators that have boosted their confidence that the economy and markets are in better position to stand with less support from large monthly central bank intervention in credit markets.

"I now think it is appropriate in coming meetings to put a tapering decision on the table as long as the resulting overall posture of policy preserves a high degree of accommodation," Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said in a speech Thursday in Fort Lauderdale, Fla.

The economic backdrop looks better now than it did in September.

Payroll employment growth during the past three months has averaged 193,000 jobs per month, compared with 143,000 during the three months before the September meeting.

Moreover, in September, the White House and Congress were heading into a government shutdown and potential a debt ceiling crisis. Now they appear to be crafting a small government spending agreement for the coming year. The headwinds from federal tax increases and spending cuts this year could wane, possibly setting the stage for stronger economic growth next year.

Still, the jobs report wasn't greeted as unambiguously good news inside the Fed. One problem was an undertone of distress among households even as the jobless rate falls.

The government's survey of households showed that a meager 83,000 people became employed between September and November, while the number not in the labor force during that stretch rose by 664,000. The jobless rate fell from 7.2% to 7% during the period effectively because people stopped looking for jobs and removed themselves from the ranks of people counted as unemployed.

"The unemployment rate [drop] probably overstates the improvement in the economy," Chicago Fed President Charles Evans told reporters Friday.

Another worry among officials, and another reason some officials might wait a bit before moving: Inflation, as measured by the Commerce Department's personal consumption expenditure price index, was up just 0.7% from a year earlier, well below the Fed's 2% target. Mr. Evans said he was troubled and puzzled by the very low inflation trend.

The bond-buying program, also known as quantitative easing, or QE, aims to lower long-term interest rates in hopes that will spur borrowing, hiring and investment. Amid all the debate about it, Fed officials are deep into discussions about how to convince the public that they will keep short-term interest rates near zero long after the bond-buying program ends.

Officials believe they can hold down long-term interest rates by signaling to investors they plan to keep short-term interest rates near zero in the future.

The Fed's strategy is to keep pressing this low interest-rate message after it takes away the turbocharge it is trying to provide with bond buying, to ensure that the central bank doesn't pull too much fuel away from the fragile economy at once.

During the summer, the Fed's message broke down. Some investors took their bond program tapering talk to mean that short-term rate increases were approaching. But officials have been relieved lately to see that their complicated message is sinking in. Futures markets place a very low probability on Fed rate increases before 2015, in contrast to September, when the markets indicated rate increases were expected by the end of 2014.

Fund managers said they were convinced the Fed would keep interest rates low for years after the central bank winds down the bond-buying program.

"People get it now that any taper will be very gradual and the Fed will still be very supportive," said Peter Jankovskis, co-chief investment officer at OakBrook Investments LLC in Lisle, Ill., which oversees about $3.5 billion.

Scott Minerd, global chief investment officer for Guggenheim Partners LLC, which has about $190 billion under management, said, "It doesn't matter" whether the Fed makes a decision on tapering this month or in 2014. "It's priced in," he said.

Mr. Bernanke hinted in a speech to the National Economists Club last month at some new rhetorical flourishes the Fed might try to drive home its low rate message.

The Fed has been saying it won't raise short-term rates until after the jobless rate crosses below 6.5%. At the rate that it is falling, that could be in 2014. But Mr. Bernanke said in his speech that the Fed would be "patient" about raising rates even after the jobless rate hits 6.5%, meaning 2014 rate increases are still seen as unlikely at the Fed. He underlined that by saying rates would stay low for a "considerable period" after the jobless rate hits 6.5%, "perhaps well after the unemployment threshold is crossed."

Fed officials have also discussed lowering the 6.5% unemployment threshold. Moreover, some officials want to indicate they're concerned about inflation getting too low by stressing that the Fed won't raise rates unless inflation has moved more decisively from its current low levels toward the Fed's 2% target.

—Michael S. Derby, Kaitlyn Kiernan, Doug Cameron, Alexandra Wexler and Tomi Kilgore contributed to this article.

Write to Jon Hilsenrath at