Economists expect Fed to stick to bond plan

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IOL br ECONOMY-JOBS Reuters. Military personnel, veterans and military spouses attend the Hiring Our Heroes job fair in Washington on Friday. American employers hired the fewest number of workers in almost three years last month, but the setback is likely to be temporary. Photo: Reuters.

Washington - The US Federal Reserve would stick to its plan for a gradual reduction in bond purchases, economists said after a government report showed that US employment rose at its slowest pace in three years last month.

The Fed would reduce purchases by $10 billion (R106bn) at each of its next six meetings this year before ending the programme in October, according to forecasts of 42 economists surveyed by Bloomberg.

The 74 000 gain in payrolls was the weakest since January 2011, Labor Department figures showed on Friday. The coldest December in four years probably contributed to a slump in hiring at construction and recreation companies, while industries such as health care and accounting cut staff.

“The weather probably did play a big role,” said Michael Feroli, the chief US economist at JPMorgan Chase in New York. “It’s a reminder that the improvement is not going to be a straight line.”

The 10-year treasury yield fell to 2.86 percent from 2.97 percent late on Thursday. The Standard & Poor’s 500 index rose 0.2 percent to 1 842.37 at the close in New York.

The median forecast of the economists projected payrolls would increase by 197 000. Estimates ranged from gains of 100 000 to 250 000.

The unemployment rate declined to 6.7 percent, the lowest since October 2008, as more people left the labour force. The rate was forecast to hold at 7 percent. The participation rate, which measures the proportion of people who are employed or looking for work, fell to 62.8 percent, matching October as the lowest since 1978.

“The medium- to long-term concern is labour force participation,” said Vincent Reinhart, the chief US economist at Morgan Stanley in New York. “Our population growth has slowed, fewer people want to work and productivity growth seems to have slowed.”

The decline in the jobless rate poses a communications challenge for the Fed, which had pledged to hold the main interest rate near zero as long as unemployment stayed above 6.5 percent. Last month it said borrowing costs would remain low “well past” that level.

“Their decision to step away some from strong rate guidance through an unemployment rate threshold in December seems prescient,” Reinhart said.

Most of the economists surveyed – 73 percent – said the Fed probably would not alter the unemployment threshold.

Last month, the Fed decided to cut monthly bond purchases to $75bn starting this month from $85bn, citing improvement in the labour market.

The White House quickly connected the jobs report with the debate on Capitol Hill on extending unemployment insurance for 1.3 million long-term jobless Americans whose government benefits have expired.

“Despite an abundance of evidence indicating that this challenge is far from solved, Congress allowed extended unemployment insurance to lapse at the end of 2013, cutting off a critical lifeline to those who lost a job through no fault of their own and are still searching for work,” said Jason Furman, the chairman of the Council of Economic Advisers.

House Speaker John Boehner, a Republican, called Friday’s report “disappointing”. He and others pointed to the decline in the unemployment rate as a measure of how many people had dropped out of the labour force. “The president’s policies are failing too many Americans, many of whom have simply stopped looking for work,” he said.

The government’s survey of households, from which the jobless rate is calculated, showed that the labour force had dropped by 347 000 people.

Poor weather probably helped depress payrolls, especially in industries such as construction. Figures based on the household survey showed 273 000 Americans were not at work because of weather during the survey week.

Last month was the coldest December since 2009, and snowfall was 21 percent above normal, according to weather data provider Planalytics.

Manufacturers continued to make strides, taking on another 9 000 jobs after a 31 000 gain in November that was the biggest since March 2012.

Car makers, coming off their best sales year since 2007, are expanding staff. Ford Motor plans to add 5 000 US jobs as it introduces 16 new vehicles.

Other companies are trimming their workforce. Hewlett-Packard planned to cut 5 000 positions in addition to the 29 000 already scheduled through financial 2014, the technology group said in an annual filing. - Shobhana Chandra and Joshua Zumbrun from Reuters



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