Salient to Investors:

Ethan Harris at Bank of America said:

  • The decline in the jobless rate in August to 7.3 percent was due to Americans giving up on finding work and is forcing the Fed to struggle with how to minimize it as a policy benchmark without damaging their credibility.
  • Picking the unemployment rate as the key growth-side indicator was a huge mistake for the Fed and they have almost immediately abandoned it.
  • It is a bad idea for the Fed to monkey with the unemployment threshold, even though it is now irrelevant.

Bret Barker at TCW said the Fed directives have misled investors and contributed to volatility in the markets, while the shrinking labor force was always the problem with measuring unemployment. Barker asked how credible is the Fed’s forward guidance when it told us to watch these numbers and then told us to discount them?

William C. Dudley at the FRB of New York said the decline in joblessness overstates the degree of improvement, and other measures such as hiring and job openings point to much more modest progress.

Federal funds futures contracts traded at CME Group gave a 29.6 percent probability that the Fed will lift its benchmark by at least 0.25 percent at its December 2014 policy meeting.

John Silvia at Wells Fargo Securities said the Fed has tried to be very helpful but too specific and transparent, and is not surprised the Fed is backing away from a bad decision.

James Bullard at the FRB of St. Louis Fed said the hazards of tying policy to the unemployment rate doing were illustrated with the most recent unemployment report, when unemployment went down only because labor-force participation went down.

Fed Governor Jeremy Stein said the Fed should tie tapering more closely to economic data like joblessness and shifting the unemployment marker would be problematic because it would show that the FOMC was willing to move the threshold around and worry the markets.

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