The Fed did not answer market questions of the timing and type of operations that Fed policy would eventually demand. The policy statement released today was little changed from September's.
No detail was given to how the Fed intended to drain the excessive reserves from the banking system or provided any insight on when the policy rate will rise from its near zero target. The statement again noted that economic conditions were likely to warrant exceptionally low levels of the federal funds (policy) rate for an extended period. The wait continues for some change in the Fed's language as I suspect the Fed is wary of exciting the market. After all, the early moves only lessen the amount of Fed generosity on a path toward a more normal real (inflation adjusted) funds rate.
The Fed has been testing reverse repo operations since mid October but no mention of that was in the statement. The Fed will complete the $1.25 trillion of mortgage backed security purchases and a smaller $175 bln of GSE debt purchases by the end of the first quarter of 2010. The $25 bln downward adjustment to agency debt is tied to limited availability. The $300 bln purchase of Government debt is already complete.
Friday's Employment Report
The continued uptrend in the unemployment rate is believed to be one constraint on the Fed's policy direction. The early employment indicators offer no clear reason to expect a change from the very slow improvement seen to date. The consensus forecast may be a bit too bright at -175,000 lost jobs.
The best forward indicator for monthly payroll growth comes from ADP -- the private company that distributes payrolls for many large companies. ADP's -203.000 estimate for October's decline in private employment may be the sixth consecutive overestimate, as the recent downtrend in non-included government payrolls adds further weakness to the full payroll report.
Modest improvement in the weekly unemployment benefits claims also argue for small improvement from the -232,000 average decline of the last two months. Initial claims (a good indicator of layoffs) still holds above 525,000 as a level closer to 400,000 typically marks gains in payrolls. Both initial and continued unemployment claims remain above their peaks of the last two recessions suggesting continued weakness at least through year end.
The least accurate employment indicators come from the ISM employment surveys which showed a surprising rise from manufacturing (despite over 3 years of monthly declines and an October manufacturing drag in the ADP index) as the large majority in the non-manufacturing index fell to a five month low -- well below the positive growth marker.
The turn toward growth in payrolls may wait for mid-2010 as the unemployment rate turn should be earlier, possibly in the first quarter. The financial markets (and politicians) will continue to worry as the slow improvement in labor conditions continues despite clear growth in the economy overall.