Jobs Disappoint But Still Clear Fed’s Low Taper Bar

(Bloomberg Opinion) -- The Federal Reserve will almost certainly announce its plan to begin reducing its bond purchases next month. But the U.S. labor market definitely isn’t making it easy for it.

U.S. employers added 194,000 workers in September, far short of the median estimate of a 500,000 gain in a Bloomberg survey of economists. August’s increase of 235,000 jobs was revised higher to 366,000, but that’s still less than half of the 733,000 forecast at the time. Meanwhile, the unemployment rate tumbled to 4.8%, compared with expectations for a dip to 5.1%, meaning it’s already in line with Fed officials’ median estimate for the end of the year.

It wasn’t a knockout report by any stretch — but it never had to be. As a reminder, Powell said at his Sept. 22 press conference that “we could easily move ahead at the next meeting or not” with plans to scale back the Fed’s bond buying. He was asked in a follow-up question about what he’d have to see in this September jobs data. He said:

“It’s accumulated progress. So, you know, for me, it wouldn’t take a knockout, great, super strong employment report. It would take a reasonably good employment report for me to feel like that test is met. And others on the Committee, many on the Committee feel that the test is already met. Others want to see more progress. And, you know, we’ll work it out as we go. But I would say that, in my own thinking, the test is all but met. So I don't personally need to see a very strong employment report, but I’d like it see a decent employment report.”

This was a decidedly low bar, particularly after the lackluster August employment report. Heading into this latest release, eight strategists surveyed by Bloomberg said the U.S. would have to add fewer than 200,000 jobs to cause a rethinking of the pace of the economic recovery and the timing of Fed tapering.

Yes, Friday’s 194,000 figure failed to meet that threshold. Still, when I heard Powell say the test for substantial further progress was “all but met” in his mind, that made clear that barring an unexplainable contraction in the labor market, scaling back the central bank’s emergency policies was just a matter of getting to the next meeting.

Policy makers can explain away some of September’s jobs report by pointing to the lingering effects of the Covid-19 delta variant. As Tom Simons of Jefferies LLC pointed out, in addition to broad weakness in hiring across services, including leisure and hospitality, government payrolls and private-education jobs were also disappointing. Delayed school reopenings could have impacted the numbers along with struggles nationwide to fill jobs like custodians and bus drivers.

The beginning of last month was also the first test case for whether expanded unemployment benefits, like $300 a week from the federal government on top of state jobless payments, were constraining labor supply. The policies expired in early September with relatively little pushback from President Joe Biden and his economic advisers. The early evidence is mixed, at best: The labor force participation rate dipped to 61.6% from 61.7%, missing estimates for a modest lift to 61.8%. Participation among men was unchanged, but women dropped to 55.9% from 56.2%.

Trading in the U.S. Treasuries market suggests tapering is still on course, but there are doubts about how quickly the Fed could raise interest rates once it winds down its bond buying. Five-year notes initially rallied more than any other maturity, with the yield falling to 1% after reaching almost 1.05% in early U.S. hours. The yield curve steepened, and traders sold the knee-jerk rally in bonds in a sign that they don’t see the Fed paring back its asset purchases as detrimental to the economic recovery.

I wrote last month about how framing data as a “beat” or a “miss” is inappropriate for analyzing inflation. But everyone should be rooting for a strong labor market. While September’s data was a clear miss and certainly raises questions about the recovery and how to get more people back into the workforce, that must be separated from whether the Fed needs to be adding $120 billion of bonds to its balance sheet each month. Does gobbling up large swaths of mortgage-backed securities move the needle in filling the record number of job openings nationwide? 

The answer, obviously, is no. The unemployment rate has fallen to 4.8% from 6.7% in December 2020, when the Fed unveiled its “substantial further progress” criteria. Meanwhile, inflation concerns are running rampant, and starting to taper would be a low-cost way to make sure there’s no upward spiral in longer-term inflation expectations (if those even truly matter).

Maybe the central bank winds down the purchases more slowly, ending well into the second half of 2022. That would certainly force bond traders to recalibrate their expectations for the timing of the first interest-rate increase, which at one point was priced in for July 2022. But given the clear signaling of recent weeks, taking it off the table for the November meeting risks destabilizing markets, in no small part because October’s jobs report will come out just two days after its policy decision. 

September’s jobs report barely cleared Powell’s low hurdle, but it was just enough for the Fed to stay on track. 

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

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