(MNI) - More important numbers are to come, but recent choppy economic data are unlikely to divert the Federal Reserve from beginning to reduce large-scale asset purchases at its September 17-18 Federal Open Market Committee meeting, Fed watchers said.
Analysts agreed, however, that the reduction in purchases of longer term Treasury and mortgage backed securities is unlikely to be as large as the $20 billion once widely expected.
Although the pace of activity has not been as rapid as Fed policymakers would have liked, that is partly because of the Fed's own well-advertized plans to "taper" its "quantitative easing" plus special factors, and yet the economy is still growing fast enough to reduce unemployment, a number of analysts said.
The comments came after the Commerce Department reported that personal consumption expenditures rose a less than expected 0.1% in July, as did personal income. A 0.5% rise in goods purchases was offset by flat spending on services.
Also Friday, the University of Michigan's final August reading for consumer sentiment came in at 82.1 - three points below July. On the other hand, the Chicago purchasing managers' August index rose from 52.3 to 53.0.
These largely disappointing numbers followed more encouraging reports Thursday - notably the Commerce Department's upward revision of second quarter real GDP growth from 1.7% to 2.5%. The Labor Department reported a 6,000 decline in initial jobless claims that left the four-week moving average of claims up only slightly.
Like the Fed itself, Fed watchers are eagerly awaiting next Friday's August employment report, among other data, but as of now their expectations of an initial tapering step on Sept. 18 do not seem to have appreciably changed.
Barclays chief economist Dean Maki said "evidence has been mixed on the growth front" and that "the third quarter is off to a pretty soft start" following the upwardly revised second quarter. He said he has reduced his "tracking" estimate for third quarter growth to 1.6%, although he is still forecasting 2% for the quarter and for the second half as a whole.
Despite the lackluster growth pace, "we still do expect the Fed to taper in September," said Maki.
"On the growth front it wouldn't necessarily be justified," he said, but the unemployment rate may well "fall faster" than the FOMC expects, and Fed Chairman Ben Bernanke has put a lot of emphasis on the that rate.
With the unemployment rate at 7.4%, and with Bernanke saying the FOMC would expect to end quantitative easing around 7%, "there's not a lot of room to wait," Maki said.
So "as long as the (August) employment report doesn't suggest a deterioration" in the labor market, the Fed will begin to taper in September," he said. "Given the capital the Fed has expended on preparing markets, for them to not taper would be quite confusing for market participants."
Maki predicted a $15 billion reduction in the Fed's $85 billion monthly bond buying unless something "knocks them off course," such as a combination of slow GDP growth and "some sense the labor market is deteriorating. But "we're not seeing that in the jobless claims, and we're not likely to see it in job growth either," he said.
Charles Lieberman, chief investment officer of Advisors Capital Management, said recent data are "consistent with moderate growth, and you get ebbs and flows around it."
"The trends are not bad," and GDP growth has yielded "job growth sufficient to reduce unemployment," he said, adding that the trend of moderate growth and reduction in unemployment is "likely to be sustained."
In fact, "there is some chance it could pick up," Lieberman went on. "I don't see any meaningful risk of the recovery petering out." He too said the unemployment rate could "come down faster than the Fed's official projection."
Lieberman downplayed the recent 13.4% drop reduction in July new home sales, which prompted St. Louis Fed President James Bullard to tell MNI the tightening of home financing conditions might be reason for "going slow" on tapering. He blamed the drop not on weak housing demand but on a shortage of new homes due to an increase in household formation following a long period of reduced home construction.
Lieberman anticipated a $10 billion Sept. 18 tapering move, concentrated in reduced buying of long-term Treasury securities. "If they're going to adhere to their suggestion of completing the process by next summer, they'll have to step up the pace."
Mark Vitner, managing director and senior economist for Wells Fargo Securities, said "a lot of the weakness (in spending) has been either related to weather or to tied to anticipation of a winding down of quantitative easing."
He said mild summer weather in the South has held down spending on "services," while a reduction in mortgage refinancing has reduced demand for financial services. But none of these things should restrain the FOMC from starting to reduce bond purchases, he said.
"A lot of people look at weakness in new home sales and emerging markets and ask, 'how in the world can the Fed taper?'" said Vitner. "I ask, 'how in the world could they not.'"
"They've already paved the way," he explained. The rise in mortgage and other interest rates is "the price the Fed is paying to wind down Q.E. If they don't follow through, they've tortured the economy for nothing."
"They're going to taper come hell or high water," he predicted. "There's no reason I'd go less than $15 billion.
By contrast Mesirow Financial chief economist Diane Swonk expressed more concern about the sluggish economy and the impact of higher mortgage rates on the economy.
"It's a very uncertain scenario," she said. "It's a tough time for the Fed."
Swonk put the odds of a September tapering move at "50-50," but then added that the FOMC will "most likely taper light on Treasuries and hold on to mortgage backeds." She said the FOMC could do as little as $5 billion in reductions.
She added that "messaging is going to be key" about where the Fed will go in the future with its unconventional monetary stimulus.
--MNI Washington Bureau; tel: +1 202-371-2121; email: sbeckner@mni-news.com