This morning’s disappointing Nonfarm Payroll number — the last clean labor market measure before the noise of the shutdown — will probably have only a marginal impact on the deliberations and outcome of the October meeting of the Federal Open Market Committee next week, which was not really in play to begin with.
But even when it comes to the December FOMC meeting, a long eight weeks away, just one data point is obviously going to have little determining impact even though its disappointment points to what is likely to be a pass on a first taper.
*** It is still early days, and we are a little reluctant to completely take a December taper off the table, but we are skeptical the subject of tapering is even going to be the major item on the FOMC agenda for a while. But by all accounts, it is fair to say that even though today’s number is probably the least of them, we do still believe a taper before year-end remains rather remote. ***
*** And that is for at least two broad reasons: the noise in the data over the coming months and the immense uncertainty over the impact of fiscal policy on next year’s projections makes a December policy decision on the taper an immensely risky decision to make by a risk-averse FOMC. And just as importantly, the FOMC is determined to better anchor market expectations with its forward guidance on low rates before they again attempt a changing of the mix of its two main policy instruments (see SGH 10/18/13, “Fed: Beyond October”). ***
Low Signal, High Noise
The first reason for continued pause is the obvious one, that it will easily take until the December meeting to get less noisy data that can be fed into the Fed’s forecasting projections, which in December will include all the districts in the quarterly Summary of Economic Projections.
That applies whether the NFP came in stronger or weaker. There is just way too much potential noise in all the data that will be coming in over the next few months to place a bet on the impact of the most recent data as it comes in to shaping the Fed’s policy debate. And that is on top of the usual difficulties in revising the forecasts as new still to be revised data is inputted into the models to gauge the underlying trends across the economy, not just the labor markets.
In addition, the Fed is still going to want far more time to weigh the more lasting effects of the shutdown on uncertainty and consumer and especially business investment spending that is going to be influencing the forecast revisions for next year.
Will that clarity on the likely extent of the feared fiscal retrenchment next year be any clearer by mid-December — barely within days of the deadline for the Budget Conference Committee recommendations on Capitol Hill? We seriously doubt it.
That Communications Re-Set
Secondly, and more importantly, going beyond just the evaluation and assessment of the external data, the FOMC’s focus next week and probably dominating the December meeting discussions is going to be on what we think will be, and should be, the reassessment of its communications strategy.
Chairman Ben Bernanke and Vice Chair/presumed Chair awaiting confirmation Janet Yellen will both be focused on forging a renewed and strengthened FOMC consensus for all or as many as possible of its committee members to put their accent in public remarks on the forward guidance of the lower for longer rates. A central thread of that message is the “changing the mix” theme that ample accommodation will be in place for a long time even as the additional accommodation of QE is reduced.
That, of course, assumes that the Fed will eventually be able to do so if only the data would cooperate this time with a clearer sense of the recovery and the improvement in the labor markets, which is obviously proving to be frustrating slow in coming.
And that messaging emphasis on the rates guidance will necessarily entail as we have written previously, a bit of “constructive ambiguity” (see SGH 10/18/13, “Fed: Beyond October”) on whether that ample accommodation is more about low rates or QE or both.
But for now, until there is clearer evidence on the diminishing effects of QE or whether its costs with the balance sheet are indeed proving potentially problematic (and to date, it is not), the FOMC is more likely than not to keep it in place while it deepens what it hopes is the more lasting and durable effects of its guidance.
And a last point probably worth making is that after the misfire of the September meeting decision not to taper — in hindsight, the right one — the FOMC is hardly going to spring another surprise on the markets by lurching in the opposite direction in pulling the trigger on a taper that isn’t wholly expected.
Several FOMC members have stressed in recent speeches the market cannot and should not depend on the Fed to provide guidance on its nearest term policy moves; fair enough, but on the other hand, there is still going to be more telegraphing of likely intentions than not, or any sort of return back to the pre-1994 days of the market being utterly on its own and in the dark until after the fact.
They would risk losing control of expectations and the curve again, a risk they were not willing to take in September and almost certainly won’t be taking amid noisy data to boot, and before its communications re-set is wholly entrenched in market expectations. Not in October, and probably not in December.