Stimulus Tapering Becomes More Likely as Labor Market Improves

The head of the St. Louis Federal Reserve, James Bullard, indicated on Monday that the likelihood of the Federal Reserve tapering its monthly asset purchases will increase if the labor market continues to show improvement.

Currently, the Federal Reserve is engaging in a monthly purchase of $85 billion in Treasury securities and mortgage-backed debt as part of a quantitative easing strategy. This approach aims to promote economic recovery by lowering long-term interest rates, which can also lead to a weaker dollar.

Bullard emphasized that recent improvements in the labor market make the possibility of tapering more imminent. He suggested that a modest reduction in asset purchases could acknowledge the positive labor market trends while also allowing the Fed to monitor inflation more closely in the first half of 2014.

He noted that if inflation does not move back toward the Fed’s target, there may be a pause in tapering decisions at future meetings.

Recent data from the Department of Labor revealed that the U.S. economy added 203,000 jobs in November, surpassing expectations for a 180,000 increase and reflecting a revision from a previously reported 200,000 jobs gained in October. The private sector contributed 196,000 new jobs, exceeding the anticipated 180,000.

Additionally, the unemployment rate dipped to 7.0% in November, down from 7.3% in October and better than the expected decline to 7.2%.

Many market observers now believe that the Fed may announce plans to taper its $85 billion asset purchases as early as 2014, possibly during its monetary policy meeting scheduled for December 17-18.

In light of the labor market data, Bullard stated that the chances of a Fed decision to reduce the pace of asset purchases have significantly increased.