How Fed’s 7% Jobless Avoids Deterring Bondholders Is Mystery – Bloomberg 07-01-133

Salient to Investors:

Economists at Bank of Tokyo-Mitsubishi UFJ, Barclays, Citigroup, Deutsche Bank, and UBS expect unemployment to fall to 7 percent in Q4 2013.

Drew Matus at UBS Securities said the drop will pose more communication problems for the Fed, again of its own making. Matus said bond-market volatility will increase even more later in 2013, as the drop in joblessness sows confusion among investors about the Fed’s intentions, and expects the Fed to point to other indicators, like continued low inflation, to justify extending QE until the middle of 2014.

Joseph LaVorgna at Deutsche Bank said bond prices will fall further during the next 12 months, as a faster-than-forecast decline in unemployment pressures the Fed into ending QE early – 7 percent unemployment will cause the 10-yr T-yield to rise to 2.75 percent by the end of 2013, to 3.25 percent by June 2014, after the Fed winds up purchases by January. LaVorgna said the yield curve will steepen because interest rates on 2-year notes will be anchored by the Fed’s promise to keep short-term rates near zero for a long time.

James Paulsen at at Wells Capital Mgmt says an end to QE should be more of a celebratory milestone than a scary event, reflecting a stronger economy and a wonderful thing.

The median economist expects joblessness in Q4 2013 at 7.3 percent.

William C. Dudley at FRB of NY says the Fed has been consistently too optimistic about the strength of the recovery ever since June 2009

The Fed has been too pessimistic about how quickly unemployment would fall, partly because of a decline in workforce participation led by retiring baby boomers. In January 2012, the Fed predicted the rate would average 8.2 percent to 8.5 percent in Q4 2012 versus the actual rate 7.8 percent.

Gary Burtless at Brookings said the US adult population is getting older, so we should expect labor-force participation to decline if the job market stays the same – rapidly increasing 60 to 69-year-olds have lower employment and participation rates than younger Americans even in a very healthy job market.

Mary Daly at FRB of San Francisco said structural forces, including the aging population, caused half of the decline in participation since 2008, with the other half due to cyclical influences that should reverse as the job market strengthens.

7.2 million Americans wanted work in May, even though they had given up actively searching and were not counted as part of the labor force.

Nathan Sheets at Citigroup said investors are not sure how the end of QE will play out.

Read the full article at  http://www.bloomberg.com/news/2013-07-01/how-fed-avoids-deterring-bondholders-with-7-jobless-is-mystery.html

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