The first week of 2022 was not boring. Bond yields rose to levels not seen in more than a year, stocks fell sharply, and speculative assets got hammered. It seems the minutes of the Fed’s December policy meeting (released on Wednesday) got the attention of financial markets in a way that the actual post-meeting statement did not. The post-pandemic era of massive stimulus is clearly ending. Then came the release of the December jobs report this morning. That release showed once again that there’s wide divergence between the “establishment survey” which produces the payrolls number and the “household survey” which produces the unemployment rate. New non-farm payrolls creation showed a weak 199K (versus a 450K consensus estimate), but the unemployment rate fell three tenths of a percent to just 3.9%… the estimate was 4.1%. We’re now within spitting distance of the pre-pandemic unemployment rate of 3.5%.
There continues to be noise in the jobs data. Revisions to prior months’ payrolls count were once again higher (141K over the last two months), and it’s become clear that lot of employers are late or delayed in submitting data (perhaps due to COVID) so a pattern of upward revisions has set in over recent months. Wage data YOY was 4.7%, below last month’s revised 5.1%, but higher than the 4.2% estimate as the composition of job creation favored higher paying jobs. All in all, though, nothing in the jobs report should detract the Fed from their task of accelerating the reduction of bond purchases (aka “tapering”), then beginning to raise rates perhaps as soon as the second quarter of the year.
Another component of the Fed policy shift has to do with balance sheet reduction. Halting purchases and raising rates are two important steps, but that doesn’t reduce the Fed’s gigantic balance sheet. Some policymakers like James Bullard the President of the St. Louis Fed suggest going ahead with balance-sheet runoff shortly after lifting off the policy rate. That could be accomplished passively by not reinvesting the proceeds of paydowns from current holdings, or actively by the actual sale of assets. We may be a long way from that, however. First things first. The “dot plot” suggests three rate hikes during the course of the year once tapering is complete.
Other data this week included the ISM manufacturing report which came in about as advertised at 58.7%, and the “Prices Paid” component which was notably lower than the prior month and lower than estimates as well. Durable goods orders and trade data was right on the screws versus expectations. Next week we’ll be treated to inflation data for both wholesale and consumer prices, plus retail sales for December.
Federal Reserve Balance Sheet: 2005 – Today
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