|Steve Matthews and Rich Miller|
“It will definitely pose more communication problems for the Fed,” said
Bond prices have dropped and market volatility has increased in the last six weeks as investors have struggled to figure out the Fed’s plans for its asset purchases. Prices will fall further during the next 12 months, as a faster-than- forecast decline in unemployment pressures the Fed into ending its program early, said
One consequence of 7 percent unemployment is that the yield on 10-year Treasury notes will rise to 2.75 percent by year’s end, with a further increase to 3.25 percent by next June, after the Fed winds up purchases by January, LaVorgna said. Treasuries advanced today, with the 10-year yield slipping 2 basis points to 2.46 percent as of
“The yield curve will steepen,” because interest rates on two-year notes will be “anchored” by the Fed’s promise to keep short-term rates near zero for a long time, LaVorgna added. The yield on these securities was 0.35 percent on
Bond-market volatility probably will increase even more later this year, as the drop in joblessness sows confusion among investors about the Fed’s aims, Matus said. Unlike LaVorgna, he doesn’t see the Fed ending its purchases early and instead says policy makers will point to other indicators — such as continued low inflation — to justify extending the program until the middle of 2014.
Volatility in Treasuries fell to 97.13 on
“This should be more of a celebratory milestone than a scary event,” said the
The U.S. unemployment rate dropped to 7.5 percent last month from 7.6 percent in May as employers added 165,000 jobs, according to economists surveyed by
Forecasts for joblessness in the fourth quarter of this year ranged from 6.5 percent to 7.8 percent in a separate
The Fed is purchasing
Bernanke said on
“But the 7 percent unemployment rate is indicative of the kind of progress we’d like to make in order to be able to say that we’ve reached substantial progress,” he added at a press conference following a two-day meeting of the policy-making Federal Open Market Committee.
Reaching 7 percent unemployment this year would prompt
“If we were to get to that level, in my mind we would have accomplished substantial improvement at a faster pace, and I would be very open to considering then a faster pace of reduction in purchases,” he said.
The Fed has been consistently too optimistic about the strength of the recovery ever since the 18-month recession ended in
At the same time, the central bank has been too pessimistic about how quickly unemployment would fall from a high of 10 percent in
A decline in workforce participation, partly caused by retiring baby boomers, has helped bring the rate down faster than Fed officials expected for an economy expanding at about 2 percent annually.
The proportion of the population in the labor force, either employed or looking for work, dropped to 63.4 percent in May from 66.2 percent in
“The U.S. adult population is getting older,” he said. “This means we should expect that labor-force participation will decline if the job market gets no stronger or no weaker. The number of new 60- to 69-year-olds is climbing fast,” and these adults have lower employment and participation rates than younger Americans, “even in a very healthy job market.”
Structural forces, including the aging population, have caused about half the decline in participation since 2008, said
The transition probably will happen slowly and occur over “more than a couple of years,” she added.
About 7.2 million Americans described themselves as wanting work in May, even though they had given up actively searching and weren’t counted as part of the labor force. That was up from 6.8 million a year earlier,
She’s taken computer classes and says she’s surrounded by “nontraditional students, older students like myself.” While federal, state and local governments have been cutting jobs, Strong-Daniely is optimistic about her future when she graduates in 2014.
“With my degree, I stand a better chance of landing a position than I did before I went to school,” she said.
The Fed’s focus on a 7 percent unemployment rate has raised questions about how much emphasis it will give other labor- market indicators, such as payroll growth, in deciding when to stop buying assets. What’s particularly unclear is how the central bank will react if the jobless rate falls to its new threshold simply because more Americans leave the labor force.
Investors aren’t sure how the end of quantitative easing will play out, said
“This is creating confusion for the markets about how to interpret the announced guideposts for the unemployment rate,” he said.
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