Fed taper likely in coming months on data, minutes say

Substantial Improvement

The FOMC has pledged to press on with so-called quantitative easing until seeing substantial improvement in the labor market. Employers added 204,000 workers to payrolls in October, more than forecast by economists, and the unemployment rate has fallen to 7.3% from the 8.1% rate the month before the central bank began a third round of bond buying in September 2012.

Bernanke said yesterday the labor market improvement since September 2012 is “meaningful.”

Fed stimulus has also helped push up the Standard & Poor’s 500 Index 165% from its bear-market low in 2009. The gauge has increased 25% this year through yesterday, poised for the best annual gain since 2003. The rally has pushed the S&P 500’s valuation to almost 17 times reported earnings, the highest in almost four years, data compiled by Bloomberg show.

Two-Year High

The yield on the 10-year Treasury was 2.71% yesterday, down from a two-year high of 3% in September. The average rate for a 30-year mortgage is 4.35%, below a two-year high in August, according to Freddie Mac data.

The world’s largest economy expanded at a 2.8% annualized pace in the third quarter after a 2.5% increase in the prior three months, according to the Commerce Department. A 16-day government shutdown that furloughed as many as 800,000 federal workers reduced fourth-quarter gross domestic product by 0.3 percentage point, the median of 40 economist estimates in a Bloomberg News survey last month.

The minutes show the Fed held a videoconference on Oct. 16 to discuss the risk to financial markets from lawmakers failing to reach an agreement to raise the U.S. debt ceiling.

The FOMC said their response would depend on “actual conditions” in financial markets and that they “might act to facilitate the smooth transmission of monetary policy through money markets and to address disruptions in market functioning and liquidity.”

Faster Growth

Federal Reserve Bank of New York President William C. Dudley said today faster economic growth is needed to generate the lasting job gains that would prompt him to back a reduction in stimulus.

“The missing ingredient” is that “we haven’t actually seen an acceleration in the growth rate that will actually sustain the improvement in the labor market,” Dudley, 60, said in New York. The economy will probably grow 2.5% to 3% next year, with growth “a little bit stronger” in 2015, said Dudley, who is also FOMC vice chairman. The committee next plans to meet Dec. 17-18.

Retail sales in the U.S. rose more than forecast in October, a sign that consumer spending was resilient even during the government shutdown. The 0.4% increase was the most in three months and followed no change in September, Commerce Department figures showed today in Washington.

Home prices are recovering. The S&P/Case-Shiller Composite Home Price Index climbed 12.8% in August from a year earlier for the steepest increase since February 2006.

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