Fed taper message succeeds as bonds adjust to economic data

Volatility High

The week of the jobs numbers, the Bank of America Merrill Lynch MOVE index, a gauge of Treasuries volatility, reached 76.1, the highest since Oct. 11.

The Fed has said it will keep buying assets “until the outlook for the labor market has improved substantially,” so the payroll data, along with the retail sales numbers, have bolstered speculation Bernanke will announce a reduction in quantitative easing at this week’s FOMC meeting on Dec. 17-18.

The share of economists forecasting such a move rose to 34 percent in a Bloomberg survey conducted the day of the jobs report from 17 percent on Nov. 8. Fifty-three percent predicted last month that tapering would begin in March, compared with 40 percent this month.

Bill Gross, co-chief investment officer at Pacific Investment Management Co., said Dec. 6 that the pace of payroll growth in November made the probability of a taper on Dec. 18 “at least 50-50 now” after he previously saw “some logic for a January starting point.”

Year-High Production

Stocks rose today after Fed data showed U.S. industrial production increased 1.1 percent in November, the most in a year and more than the 0.6 percent gain forecast in a Bloomberg survey. The Standard & Poor’s 500 Index climbed 0.8 percent to 1,789.31 at 10:27 a.m. in New York.

Silvia predicts the Fed won’t taper until March or June, depending on the economy. One challenge the U.S. central bank will face is how to square their so-called data dependency with inflation that’s running below their 2 percent target, he said. Prices are accelerating at a 0.7 percent annual rate, the personal-consumption-expenditures price index showed in October.

Federal Reserve Bank of New York President William C. Dudley said it’s “not disturbing” if interest rates rise because the economic outlook is improving. If financial conditions tighten because markets have an “unrealistic view” of the outlook for monetary policy -- as happened between May and September -- that is concerning, he said at a Nov. 20 press briefing at the district bank.

‘Broadly Right’

“It’s important that people get our message broadly right,” Dudley said. If the market moves “inappropriately,” it’s more difficult for the Fed to achieve its goals.

Leading up to the September meeting, investors put less emphasis on the economic outlook because Fed officials were communicating concern about rising costs associated with their bond buying and “froth” in markets, according to Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut.

Bernanke said May 22 in Washington that policy makers were “quite aware of this issue and watching it very carefully.” It does “factor into our thinking about the appropriate amount of accommodation,” and the Fed could “take a step down in our pace of purchases” in the “next few meetings.”

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