Last Friday’s American payrolls report was a “cold shower” for those who hoped the US economy was finally accelerating, says The Wall Street Journal. Just 169,000 jobs were created in August and the previous two months’ payroll gains were revised down. The unemployment rate declined to 7.3%, but only because a record number of people gave up looking for work and left the labour force.
The August employment report was especially important, as it was the last major statistical release before the US Federal Reserve meeting on 18 September. At this meeting, the Fed is supposed to decide whether to embark on ‘tapering’ quantitative easing (QE) – reducing the quantity of various bonds it buys with printed money. Next year, with unemployment around 7%, it will end QE altogether, it has suggested. Now, given the disappointing employment data, some are wondering whether the central bank might stay its hand.
Having announced a taper already, it is still likely to go ahead, reckoned former Fed vice-chairman Donald Kohn, “complete with caveats about how it could be reversed and how it doesn’t imply anything about when rates will be raised”.
The trouble is, the Fed and other central banks have been struggling to convince markets that they are in no hurry to raise interest rates. Since talk of tapering began in May, the yield on the two-year US Treasury has doubled, signalling that the market thinks the US benchmark short-term rate will have begun to climb less than two years from now, says Stephen Foley in the Financial Times. Jumps in UK long-term rates, despite the Bank of England’s insistence that the base rate will stay low for ages, tell a similar tale.
Such higher long-term rates in the market have already tightened monetary policy, says Randall W Forsyth in Barron’s. American mortgage rates, for instance, are priced off US Treasuries. Mortgage applications have slumped and new house sales “are beginning to buckle”. So one major worry is that central banks could have lost control of interest rates and monetary tightening – even before they start trying to reduce the pace of monetary loosening. And due to the poor jobs data, the pace and nature of the latter move has become more unpredictable than before. All of which, says John Authers in the FT, leaves investors with “the kind of nasty uncertainty” that can lead to “financial accidents”.