How will U.S payroll report impact QE?

US labor market has improved over the past months

Some of the more hawkish regional Fed presidents such as Bullard from the St Louis Fed or Kaplan from Dallas seem to think that one more strong payroll report could usher in a tapering announcement as soon as the September 22^nd FOMC meeting. However, Mr. Steve Barrow, Head of Standard Bank G10 Strategy said his sense from the key Board members, including Chair Powell in last Friday’s speech, would be that they would like to see a couple of strong numbers before concluding that sufficient progress has been made towards the Fed’s employment goal. With this in mind, he still thinks that November’s meeting is the most likely venue for tapering and, failing that, the December 15^th meeting. “We have argued in the past that significant monetary policy announcements have often been ‘buried’ by the Fed in the December meeting when financial markets are winding down for the holiday period. Both the tapering announcement of 2013 and the first rate hike in 2015 happened at the December meetings. We think a December 2021 announcement is still very possible, but November is more likely as long as the employment data are good and financial markets reasonably calm”, Mr. Steve Barrow forecasted.

The next part of the Fed’s task seems to be drawing a firm distinction between the inflation and employment outcomes it wants to see before tapering, and the condition required of both variables in order to provoke rate hikes. Members have started, and will increasingly stress, the different requirements for a taper and rate hikes. The former requires significant progress towards the Fed’s goals, while rate hike require the goals (of full employment and an average 2% inflation target) to be met.

We would not be surprised at all if the key members of the Fed, such as Powell and Vice Chair Clarida work hard from here on out to give the impression that achieving ‘significant progress’ does not imply that the targets will be met quickly. For a start, the Fed will probably use the buzzwords it has utilised in the past like ‘considerable time’ and ‘patient’ once it has started to taper to describe the length of time it might take until rates are raised. The market is familiar with these pointers from the Fed and hence the bank will hope that traders and investors will stay in their comfort zone and won’t freak out if these terms are used again -  and rates are ultimately lifted.

But as careful as the Fed might want to tread in setting the market up for the taper and then rate hikes, it is still hostage to the data. If inflation readings, in particular, remain too high for the market – and the Fed’s liking – there is the danger of a major asset price bust and that’s the risk that we feel is still uppermost at the moment. Hence, unlike the 2013 taper tantrum, which was more an issue of Fed miscommunication than unruly data, things could be different this time.

The Fed could have the message correct, but the data might not want to behave as the Fed would like. This in turn, could lead the communication of future rate hikes to either be changed from prior templates, or speeded up considerably. Either could cause significant financial market tension. This could happen if employment data improves far more quickly than the Fed anticipates but seems much more likely if it is the inflation component of the dual target strategy that goes awry. Either way we continue to think it puts higher yields in the frame through the remainder of the year, said Mr. Steve Barrow.