Jan Hatzius and the economics team are encouraged by today’s bullish jobs report.
It was so good that they’re now bumping up their forecast for when the Federal Reserve will begin to taper, or gradually reduce, its monthly purchases of $85 billion worth of Treasury and mortgage bonds. They now see it happening in September.
In light of the better-than-expected labour market data over the past few months, we are bringing forward our call for the Fed tapering QE purchases from the December FOMC meeting to the September meeting. We expect that purchases may be reduced from the current rate of $85bn per month to $65bn per month, with most or all of the adjustment occurring through reduced Treasury purchases. We now expect purchases to continue through Q2 2014 (vs. our prior forecast of Q3 2014), in line with the guidance given by Chairman Bernanke at the last FOMC press conference. We are not changing our call for the date of the first fed funds rate increase, which remains in Q1 2016, at which point we forecast an unemployment rate of 6.0%. Fed officials are likely to work hard to dissuade the market from raising its short-term interest rate expectations. This may include changes in the FOMC statement around the conditions for the first hike in the funds rate, including—if needed—a reduction in the 6.5% unemployment threshold.
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