Wednesday, October 23, 2013

The Fed & Unemployment (excerpt)

In a melt-up scenario over the next three months, Janet Yellen would be starting her new job with a bubble in the stock market. In addition, January’s unemployment rate, which will be released on February 7, could be down to 7.0%, which isn’t that far down from September’s 7.2% reported yesterday. At his press conference on June 19, Bernanke outlined a playbook that would terminate QE at 7%. He downplayed that game plan at his September 18 press conference. Yellen’s first FOMC meeting as chair of the committee will be on March 18-19. After that meeting, she will hold her first press conference. That should be interesting.

It’s certainly conceivable that even a 7% unemployment rate won’t cause the Yellen-led Fed to start tapering. The doves dominate the FOMC, and most of them are on the record as believing that the fall in the unemployment rate is exaggerating the improvement in the labor market. That’s because lots of people have simply dropped out of the labor market.

Indeed, the jobless rate would be closer to 10% right now if the labor force participation rate were at 65%, as it was during November 2009, rather than September’s 63.2%, which was the lowest reading since August 1978. The FOMC’s doves also typically observe that the employment-to-population ratio has been stuck near the 2009 low for the past five years.

Today's Morning Briefing: Thinking About A Melt-Up. (1) Worrying more about less to worry about. (2) Deep in the heart of Texas. (3) Smaller stocks with higher P/Es beating the bigger ones with lower valuations. (4) Three months til Yellen replaces Bernanke. (5) Record liquidity and margin debt. (6) A market for momentum players. (7) An impressionistic picture of stock prices that may continue to go vertical. (8) How will we recognize irrational exuberance? (9) Yellen will have lots to talk about at her first press conference on March 19. (10) Labor force dropouts continue to push jobless rate lower. (More for subscribers.)

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