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Has the employment situation affected the Fed?

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Last week's Employment Situation (Jobs Report and Unemployment Rate) surprised on both accounts. The very low number of new non-farm jobs, at 74k, is far lower than 200k expected. And the Unemployment Rate dropped to an unexpected 6.7% when 7% was expected.

When looking at the Unemployment Rate, the reason for the drop is not a positive, but a negative with a loss 347k in the labor force. What percentage is due to retirement, or simply due to those giving-up the search for jobs, is uncertain.

The other question which is confusing the Fed is the low jobs number. Is this a fluke, or is it an indication of an economy slowing further?

We are expecting that the Fed will continue to remain lose, keeping rates low and slowly tapering quantitative easing (QE). And, we do anticipate that the debate within the FOMC members will be heated. Janet Yellon, who will not officially take control of the chairmanship until February 1st, will likely chair the next FOMC meeting at the end of this month.

The debate amongst the FOMC members will revolve around two approaches to tapering: First, that it is data dependent (which raises the issue of what data will the Fed rely on); or second, that tapering will continue with each FOMC meeting reducing bond and mortgage-backed securities by $10 billion. If the latter, then QE should end by early 2015.

With regard to the Funds Rate, the Fed said that it will remain low regardless of the action taken on tapering QE, even when QE ends. With continued tapering, long-term treasury yields will continue to rise as they have in the past.

A highlight in economic news has been the increase in Utilization Capacity, which indicates the Industrial Production is rising; especially the manufacturing sector.

In addition, today's Retail Sales Report and Import and Export Prices are encouraging. The markets are acting favorably today, and could offset much of the loss that occurred yesterday in the markets.

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