On Friday, traders, investors and policymakers around the world will wait for the clock to strike 8:30am for the latest peek at the U.S. job market.
Investors thought they understood how such data releases would affect the Fed's bond-buying strategy; now, the number that flashes on Bloomberg screens Friday morning will likely just add to the confusion.
The Fed seemed ready to abandon its quantitative easing (QE) training wheels over the summer, but has since changed its mind, stating last week that it "decided to await more evidence that progress will be sustained before adjusting the pace of its purchases."
Monthly jobs data have been remarkably flat for the past year, and economists predict a lukewarm 120,000 reading for October, thanks in part to the government shutdown. A quick glance at the monthly non-farm payrolls numbers paints a boring picture. The economy has been softly puttering along, adding about 160,000 jobs, give or take, for the past three years, according to the six-month moving average.
At current levels of jobs added, it would take five years for the unemployment rate to dip back towards 2007-levels. Given this modest outlook, the big question is: why is the Fed thinking about tapering at all? And what would it take to start now?
Each upcoming jobs report should hold more clout than usual, especially because the Fed has been so equivocal about what it would take to begin trimming its bond purchases. Bernanke's Fed has made a point about improving its communications and making well-known its commitment to a dual mandate of maximum employment and price stability. They followed through with this in some respects, introducing clear thresholds for interest rates: 6.5 per cent unemployment rate and 2.5 per cent inflation.
With unemployment hovering around 7.2 per cent, and inflation expected only 1.5 per cent in 2014, both sides of this equation would indicate that the Fed's hands should be tied right now.
However, in June, Ben Bernanke dropped the QE-bomb heard 'round the world, nonchalantly mentioning in the post-FOMC press conference that the Fed expects to begin tapering later this year. Markets ran away with this – instantly pricing in tapering for fall 2013, only to be slapped in the face by the Fed, who left policy intact in September.
Bernanke's summer warning was the most blatant signal from the Fed about QE yet, but he still did not provide any real clarity. He said he expected the entire program to be done by the time the unemployment rate reached 7 per cent, but made no mention of what number would constitute a trigger for the Fed to begin stimulus reductions.
There is a key technicality the Fed is exploiting to justify its confusing QE-guidance. While the Fed nails interest rates to thresholds, it stresses that QE is not tied to any specific number. All discussion of quantitative easing has been purposefully convoluted.
This allows the Fed to continue changing its mind, as it did between June and September, although there's only so many times that can happen before credibility becomes a problem.
It also leaves markets' imaginations to run wild. Economists now expect tapering to hold off until next year. "The Fed needs to see the economy move toward the 'tolerable twos' to taper: growth in the upper-2 per cent range, closer to job gains of 200,000 per month, and inflation converging toward the 2 per cent target," said Michael Hanson at Bank of America Merrill Lynch.
"They obviously don't look at a single month's payrolls when making decisions, so the entire three-month and six-month trends will have to change direction before they act," according to Gennadiy Goldberg, rates strategist at TD Securities in New York.
This week's payrolls number will be distorted by the government shutdown. The Fed will likely have to wait for November to see if the economy can deliver a jobs report that shows growth above 200,000, or if we will be stuck in the same middle range of data seen recently: not great, but not terrible enough to push the Fed in any discernible direction.