Fed Likely to Wait to Taper
The June employment report was probably not strong enough to prompt the Federal Reserve to begin tapering its QE purchases before September.
By Steve Van Order, Fixed-Income Strategist, Calvert Investment Management, Inc.
On June 7, the Labor Department announced that the U.S. unemployment rate for May was 7.6% as the economy added 175,000 nonfarm jobs in the month. This unemployment report may provide some clues about when the Federal Reserve (Fed) will start to taper down its quantitative easing (QE) purchases of Treasuries and mortgage-backed securities. Depending on the strength of future monthly employment reports, we believe that the Fed is likely to wait until at least September to start tapering the size of its monthly QE bond buys.
Since the May unemployment rate was a slight increase from the 7.5% rate in April and the number of jobs added was less than 200,000 for the third consecutive month, we believe that the jobs report was not vigorous enough for the Federal Open Market Committee (FOMC) to announce at its June 19 meeting that QE tapering will start. If the June unemployment report shows a strong labor market, there’s a chance that the FOMC could make a tapering announcement at its July 31 meeting. However, we believe that a first QE tapering statement is likely at the September, October, or December FOMC meeting, depending on the robustness of economic data.
September or December Tapering Start Most Likely
A recent poll of economists showed an approximately even distribution of expectations for a tapering announcement at the September, October, or December FOMC meeting. The September and December meetings will have updated FOMC forecasts and monetary policy outlook surveys as well as press conferences by Ben Bernanke, so they seem more attractive for a major announcement than the October meeting.
Taking all of these factors into account, we believe that a September announcement of a relatively modest (about $10 billion to $15 billion) monthly slowdown in QE purchases or a December statement about a larger ($20 billion or more) monthly tapering are the most likely scenarios. This outlook could change if the labor market and U.S. economic data in general starts to markedly strengthen or weaken, however.
Japanese Market Volatility Remains a Wildcard
If the Fed does wait until fall or winter to start slowing its monthly QE buys, we think that the markets for high-yield corporate bonds and mortgage-backed securities, which have recently sold off as a result of fear about imminent Fed tapering, should recover this summer. The recent volatility in the Japanese markets is still a significant wildcard because it has the potential to influence global markets this summer if it persists. Ben Bernanke will appear on Capitol Hill in August to testify about the U.S. economy and monetary policy, so he may then shed some light on the Fed’s thinking about worldwide economic and financial-market conditions. Later in the year, the need to raise the U.S. debt limit this fall and the outcome of the German elections in September could create elevated volatility in the markets.
This commentary represents the opinions of its author as of 6/11/13 and may change based on market and other conditions. The author’s opinions are not intended to forecast future events, guarantee future results, or serve as investment advice. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither Calvert Investment Management, Inc. nor its information providers are responsible for any damages or losses arising from any use of this information.
Calvert Investment Management, Inc., 4550 Montgomery Avenue, Bethesda, MD 20814