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Friday, November 29, 2013

Will the Fed "Taper" in December? Inflation is the Key

by Calculated Risk on 11/29/2013 08:49:00 PM

A month ago I asked Will the Fed "Taper" in December? Although the consensus is the Fed will wait until 2014 to start to taper asset purchases, December is still possible.

From a month ago:

There are many key releases right at the beginning of December, and we know the Fed is "data dependent".  So here is what the FOMC would like to see to start tapering: 1) the unemployment rate fall to 7.2% in the November report, 2) Employment up about 2.2 million year-over-year in November, 3) inflation increasing toward 2% target, and 4) some sort of fiscal agreement by Dec 13th.  All possible.
• The unemployment rate criteria should probably be expanded - not only would the Fed like to see the unemployment rate decline in November, they'd like to see the participation rate increase (the participation rate declined sharply in October to 62.8% from 63.2% in September, and I suspect the Fed will like to see some of that reversed in the November report). The unemployment report will be released next Friday, and the consensus is the unemployment rate will decline to 7.2%.

• Following the solid October employment report, it will be pretty easy for total employment to be up 2.2 million year-over-year in November (employment was up 2.33 million year-over-year in October).  The Fed will probably be looking for November job growth in line with the consensus of 180 thousand.

• Inflation is probably the key right now.  Core PCE was up 1.2% year-over-year in September, and the Fed would like to see this increasing towards their 2.0% target.   PCE prices for October will be released next Friday, and the consensus is for core PCE prices to only be up 1.1% year-over-year.  Low inflation might stop the Fed from tapering in December.

• Some sort of fiscal agreement looks likely now since Congress is playing "small ball". Of course you never know with Congress.

Right now the key is inflation.