The pace of US job creation disappointed for the second month in a row, fueling market doubts as to whether the Fed might really be able to cut its bond purchases as early as next month.
Not all of the underlying details are so disappointing, however, as the unemployment rate has fallen for the third straight month to levels that could approach the threshold below which underlying inflationary pressures could intensify further. In addition, the hourly profits surprised positively and accelerated compared to the previous month.
While the latest job report could challenge popular opinion in the marketplace that a reduction in the announcement at the November monetary policy meeting is very likely, we suspect that more than a single piece of data will change the timing. Unless there are further downside surprises, we believe that a formal tapering signal before the end of the year will continue to be seen by the Fed Committee as a key scenario.
The key question, regardless of the exact QE path, is what happens to the policy rate. In our view, the timing and pace of the rejuvenation are not a direct signal of future rate hikes. While Fed projections suggest that a growing number of policymakers believe that a rate hike may be warranted sometime in 2022, we anticipate it will take up to a year, if not longer.