September Taper? August Jobs Number Could Begin Bond Buying Drawdown

Many people expect that the Federal Reserve will begin tapering their $85 billion/month bond buying program later in September, barring some sort of unexpectedly weak August jobs report.

The August jobs report is due out before the bell on Friday morning. The consensus is for 180,000 new nonfarm payroll jobs and an unchanged national unemployment rate of 7.4%. Unless the US economy added significantly less than 180,000 jobs in August, you can expect that the Federal Reserve will begin "tapering" later in the month.

In July, 162,000 non farm payroll jobs were added, while the national unemployment rate dipped from 7.6% to 7.4%. The labor force participation rate clocked in at 63.4%, while the U-6 unemployment rate (which measures labor underutilization in the United States) was 14%.

A 180,000/7.4% August jobs report is seen as being more than enough for the Fed to announce the beginning of the tapering to their $85 billion/month bond buying program. The Federal Reserve has already said that they are hoping to completely phase out their bond buying program sometime in 2014, barring some sort of unexpected slowdown in the US economy.

Interest rates have increased dramatically since May when the Federal Reserve first signalled their intention to start phase out their quantitative easing program - the 10-year has risen from about 1.6% to over 3% in just a few short months. The Federal Reserve has been purchasing bonds in order to keep interest rates low in order to spur the economy, so increasing interest rates are a natural result of the Fed indicating that they will soon be starting their tapering program.

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The general consensus is that the Federal Reserve will reduce their monthly bond purchases by between $10-$20 billion in September, with the majority (or all) being reduced from Treasury purchases (currently the Fed is purchasing $40 million a month in mortgages and $45 billion a month in Treasurys).

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The August jobs number is due out in a couple of hours.

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