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Fed's plans to taper unshaken by bad jobs report: economists

Yati Himatsingka and Rahul Karunakar

By Yati Himatsingka and Rahul Karunakar

(Reuters) - The U.S. Federal Reserve is set to announce another $10 billion cut to its $75 billion in monthly asset purchases in January and shut down the program by year-end, despite a shockingly poor jobs report for December, a Reuters poll showed.

The U.S. economy created a paltry 74,000 jobs in December, the weakest in nearly three years. This was just under one-third the amount expected in a Reuters poll, and financial markets had been bracing for an even higher number.

Economists blamed the disappointing number on the weather, which was unusually cold across the country.

But the unemployment rate, which the Fed is using to guide expectations on when it will consider raising its key interest rate from a record low, fell sharply to 6.7 percent, the lowest since October 2008.

Richmond Fed president Jeffrey Lacker told a business group that the fall in the jobless rate backed the view that there has been substantial progress in the labor market.

There is plenty of evidence, however, that the jobless rate is falling rapidly because many people have given up looking for work. The jobless rate is derived from a survey of households, while the non-farm payrolls report is based on information from employers.

"It was a slam dunk in my mind that January 29th they would announce another $10 billion in taper, but the most recent data makes that a more dicey proposition," said Michael Carey, chief economist for North America at CA-CIB.

"However we suspect that they will continue at the January meeting and subsequent meetings with measured reductions of $10 billion. I do not think today's data will derail them," Carey added.

After wrong-footing predictions for a trim in September, the Fed surprised many in financial markets again in December with its decision to cut its monthly asset purchases by $10 billion starting this month.

Of the 21 primary dealers, banks authorized to trade securities directly with the Fed, all 18 who responded to the poll expect the central bank to cut $10 billion at each meeting this year. The broader sample is similar.

Of the total sample of economists polled, 22 said the quantitative easing (QE) program will wind up in December; four said November; 13 said October and five just said some time in the fourth quarter. A minority said earlier in the year and only one said early next year.

But a rate hike is a long way off. Only 16 of 56 economists said the Fed will lift the federal funds target rate, its key overnight interest rate, before July 2015. The rest of those surveyed see it later that year or even in 2016.

The dollar fell after the disappointing jobs report. But a separate Reuters poll on Wednesday showed it will be one of the best-performing currencies in the first half of this year at the euro and yen's expense.

Short-term rate futures rallied after the disappointing payrolls report, showing investors in interest rate markets expect more lag time before the Fed raises rates.

This was a retracement from steep losses earlier in the week that had drawn forward the market-implied timeline for the Fed's first rate hike to as early as the spring of 2015. By Friday afternoon, fed fund futures prices implied the first Fed rate hike would not occur before the summer of 2015.

(Reporting by Rahul Karunakar and Yati Himatsingka; Polling by Shaloo Shrivastava in Bangalore and Curtis Skinner in New York; Editing by Ross Finley and Chizu Nomiyama)