'Septaper' and the jobless recovery

By: Danny Riley

While the Fed taper drums continued to beat, last week’s disappointing jobs report complicated the argument that quantitative easing was no longer needed. Meanwhile, world leaders have raised alarms that a hasty exit from the Fed’s bond buying program could disrupt the global recovery. Now some key dates are upon us and may prove or confound predictions. Mark these on your calendar:

• Sept. 9: House and Senate return 9 legislative days before the end of the fiscal year and before the current spending authority expires.
• Fed policy meeting on Sept. 17-18 will likely decide on a start to tapering of bond purchases.
• The Fed expects to halt the bond buying program by mid-2014, when it forecasts that the U.S. unemployment rate will be around 7%.

The clock is ticking

According to a recent Reuters poll, bets firmed up last month that most economists and primary dealers agree that the Fed could start to “ease” QE3+ after the Sept. 17-18 two-day meeting. Additionally, one of the Fed’s most hawkish officials, Kansas City President Esther George, will be urging the central bank to reduce its bond buying program to $70 billion a month.

At the same time, Chicago Fed President Charles Evans, like George a voter on the policy-making committee, is still saying a move to taper is not a done deal. He said he would continue to weigh “evidence about the durability of the economic recovery,” although he said he could be “swayed toward a pullback.” Speaking in in Greenville, S.C., he went on to say, “This is a period where it’s even more important to go into an FOMC meeting with an open mind. There’s been cumulative progress on the economy. I can be persuaded that there has been enough improvement.”

Evans said he was disappointed to see labor force participation fall again and added that the jobless rate could be going down because of discouragement rather than hiring. He went on to say that the economy is still around 5 million jobs short of where it should be at this point. Last Friday’s data showed the unemployment rate in August down to 7.3% and at a 4- 1/2 year low.

On Friday Richard Fisher, president of the Federal Reserve Bank of Dallas, said, “There is an expectation that we will act in September. Will we? It depends on the committee.” Fisher has been eager to pull back on the program because he doesn’t think it’s doing any good and because he is uncertain of the outcome.

While we often caution against trading the news, we always urge you to be aware of what news might cause market flutters and fluctuations. This month is one to keep the TV on and in particular, stay tuned to MrTopStep, where we will be debuting our new video channel in partnership with AOL On TV later this month.

There has been an increased level of taper talk recently, and while we have always paid attention to the subject, we think it’s time to pay closer attention to “Septaper” and what the Fed is saying as we move closer to this month’s two-day Fed meeting. Volatility has picked up and we expect it to stay that way.