Despite weak jobs report, economists see stimulus tapering on track

Federal Reserve watchers are still expecting the central bank to reduce its asset purchases this month, despite a weak August jobs report.

Market analysts and economists, who have been predicting a September start to the central bank's tapering of $85 billion in monthly bond purchases, say the Fed will move forward, but in smaller increments.

The central bank could reduce bond-buying by $10 billon to $15 billion when the Fed meets Sept. 17-18.

Mark Zandi, chief economist at Moody's Analytics, said he thinks the Fed will move forward with the tapering, but reduce the amount.

"Although with today’s disappointing jobs report, I say this with less conviction, and I think they will start with a small tapering of $10 billion in Treasury bonds," Zandi said.

Kansas City Fed President Esther George, who is a critic of the monetary stimulus program, said on Friday that the Fed could move to reduce purchases to about $70 billion with the aim of ending the program in the first half of next year.

"I continue to support slowing the pace of purchases as the appropriate next step for monetary policy," she said in a speech.

The general sense among economists was that job creation in August would be stronger, and the Fed would have no reason to hesitate on the tapering of its long-running stimulus.

But the economy added a disappointing 169,000 jobs in August, while the unemployment rate continued its decline, falling to 7.3 percent.

Previously reported job gains came in nearly 75,000 lower than first estimated in June and July, raising concerns about the health of the fragile labor market and the broader economy.

The last three months have averaged only 148,000 jobs, lower than the nearly 200,000 in the spring.

The Fed has indicated that it is looking for consistency in the economic recovery that includes steady jobs growth and a drop in the unemployment rate, even if there are other worrisome data buried within the more positive figures.

PIMCO's Bill Gross said he thinks Federal Reserve Chairman Ben Bernanke is committed to pulling back on their purchases "but it will be taper-light as opposed to a strong taper."

Like Zandi, he is predicting a $10 billion reduction, he told Bloomberg Surveillance.

Still, he said the taper does not really reflect the growth or strength of the economy.

The Fed is "really focused on de-bubbling risk markets in terms of a frenzied narrowness of spreads, or even a frenzied peak in terms of equity prices," he said.

"But I would suggest otherwise, that it is really a weaker economy as evidenced by today's report."

John Canally, head of LPL Financial, said that the job numbers blew any chance of a larger $20 billion to $30 billion reduction, according to Yahoo! Financial.

He also said a $10 billion taper is most likely with the Fed telling the markets "'we're going to do this now then wait and see.'"

Canally argued that there is little economic argument for tapering and the new data "makes it much less compelling economically."

Plus, the Fed has "boxed themselves into a corner" by promising to reduce its purchases and would probably lose some "street cred" if it backs down.

But there are those who continue to argue that the underlying weakness of the job market should give the Fed pause.

Keith Hall, the former head of the Bureau of Labor Statistics and a fellow at George Mason University, said if the Fed was looking for some encouraging news, it wasn't in the August report.

In fact, he said, the data should push the central bank in the other direction.

With the economy essentially treading water, there are other figures that reflect its struggles, including the employment rate, which has dropped to 58.6 percent down from a pre-recession high of 63 percent — a gap of at least 10.5 million jobs, Hall said.

Heidi Shierholz, chief economist at the Economic Policy Institute, said the jobs report underscores the "fact that we still need all macroeconomic guns blazing to boost the economy."

"At this rate, it would take until well into 2021 to fill our gap of 8.3 million jobs and return to a healthy labor market."