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Payrolls Miss, Tapering May Be Scaled Back Says John Canally

Payrolls Miss, Tapering May Be Scaled Back Says John Canally

The U.S. economy added 169,00 nonfarm payrolls in August according to the Bureau of Labor Statistics. The BLS also revised June's number to 102k from 162k previously announced. The weaker than expected data called into question the wisdom of tapering later this month. The closely watched labor participation rate fell to 63.2%, the lowest level seen since 1978.

Related: Traders Struggle With Perfectly Terrible Jobs Number

Despite the bleak employment situation, the Fed is still widely expected to reduce ("taper") it's $85 billion per month Quantitative Easing program later this month. The question no one can answer is "why?"

Ben Bernanke's term has been defined by communication. Last December the FOMC clearly announced its intention to keep stimulating until unemployment fell to 6.5% or inflation exceeded 2%. Inflation is approaching 2% but still below the Fed's bogey. Unemployment is 7.3 on the headline and much worse than that in the details. The FOMC is tapering anyway apparently because Bernanke is leaving at the end of January.

You can argue QE was stupid in the first place but at least we knew the plan. Now uncertainty is being created in the waning days of Bernanke's tenure. On the one hand the economy continues to struggle. On the other hand Bernanke would like to begin reducing stimulus prior to passing the baton.

John Canally of LPL Financial says a compromise solution is in the cards. Today's miss "keeps the Fed on the track to taper but if they were going to do a full-blown taper, in other words taper by $20 or $30 billion at this meeting, they might now look at this data and the downward revisions to prior months and maybe just do a taper light; maybe do a taper of $10 billion and tell the market 'we're going to do this now then wait and see.'"

Canally says the economic arguement for tapering was always questionable at best. The government has spent roughly a trillion dollars on this round of Quantitative Easing with little to show for it in terms of jobs creation. That being the case, quantitative easing should simply stop rather than be reduced by incremental baby steps.

If insanity is doing the same thing repeatedly and expecting different results, expecting a gradual reduction of QE to meaningfully change the economy is inanity. As it currently exists, quantitative easing clearly isn't working. The program should either be increased or preferably stopped. A compromise solution serves no one.

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