Friday’s jobs report, GDP, and the future of interest rates
Update…Presumptive future Federal Reserve Chair Janet Yellen has made some very dovish comments regarding future Fed policy. More to come on this soon.
It’s rare that a jobs report is as surprising as the report issued last Friday and the ramifications for long-term interest rates could be huge. Most experts expected the economy to have added 100,000 new jobs in October. The employed work force grew by double that number, adding 204,000 new jobs. Almost as significant was the revision upwards in the September and August estimates as it turns out 60,000 more jobs were added than initially estimated. This, coupled with a GDP growth rate that is heating up (not that 2.8% growth is a sign of inflationary worry) signals stronger growth overall, and more importantly, better sustained growth than most economist had believed were present to day. While there was an uptick in the actual rate of unemployment, this data was shrugged off by economists since it was attributed by most to the government shutdown and temporary furloughs.
What does all of this mean in practical terms? If positive numbers keep coming over the next several weeks, the federal reserve board’s December meeting could have a very big impact as they decide whether to keep supporting mortgage rates with their QE3 bond buying program. Some Fed members have been looking for the opportune time to begin tapering off QE3 and reports like last Friday’s give them all of the cover that they need. Mortgage bond prices fell (raising rates) on Friday as much as they have in a single day since the Fed made comments about the possibility of a taper back in June.
While the market seems to have stabilized this morning, one thing is certain. There will be a lot of volatility before the Fed meeting scheduled to take place next month as every report is scrutinized with a fine tooth comb and every comment by a fed member is parsed for signs of their intent for the rate market. Stay tuned for further updates.