Fed to begin tapering in November unless weak job growth: Moody's

ANKARA

The US Federal Reserve will begin tapering, the process of scaling back its $120 billion worth of monthly bond purchases, in November meeting as long as there is not weak jobs growth, according to Moody's.

"As long as September employment isn’t a disaster, the Fed will begin tapering at its November meeting. Therefore, it would skip a formal announcement and a one-meeting delay to dive right into the tapering process," it said in a report Thursday.

The global rating agency said it is possible to see an eight-month taper with $15 billion reduction per month.

The next meeting of the Federal Open Market Committee (FOMC), which sets monetary policy for the Fed's operations, will conclude on Nov. 3.

FOMC said Wednesday at the conclusion of its last meeting that moderation in the pace of asset purchases may soon be warranted, indicating tapering would soon begin. The Fed Chair Jerome Powell later said the bank may conclude tapering by mid-2022.

Many analysts believed it was weak employment figures of last month, and high fluctuations, in markets that prompted the bank to delay its formal announcement on tapering timeline.

US economy could only add 235,000 jobs in August, much lower than the expected 750,000, according to the Labor Department figures.

The jobs data for September will be released on Oct. 8 at 8.30 a.m. EDT.

"Things can change and the next several weeks could be rocky ones for the economy and financial markets, which could factor into the Fed’s timing of tapering," Moody's said.

"The Fed likes flexibility, which is why it didn’t commit to a specific date, because it knew about the potential for a partial government shutdown and a nasty debt-ceiling battle," it added.

Besides the Fed's monetary stance, there are fiscal issues such as the US government facing a shutdown, and the US Treasury's debt limit.

Although the House of Representatives passed a bill on Tuesday to temporarily fund the government and suspend the debt limit, it may fail in the Senate where Republicans are expected to block it.

Moody's said it assumes there will not be a partial government shutdown, but warned risks are rising, and added "Whether Republican, Democrat or Independent, lawmakers know that voting against raising the debt ceiling would have enormous economic costs and be political suicide."

"The Fed doubled the size of counterparty limits on its reverse repo facility from $80 billion to $160 billion. This should ease some pressure on short-end rate markets and the Treasury bill market," the agency said.

"This week the Treasury Department announced that it is reducing the size of its weekly three- and six-month Treasury bill auctions by $3 billion to create room under the debt ceiling limit," it added.