STOCK MARKET WATCH -- Tuesday, 2 July 2013

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13. How Fed’s 7% Jobless Avoids Deterring Bondholders Is Mystery

http://www.bloomberg.com/news/2013-07-01/how-fed-avoids-deterring-bondholders-with-7-jobless-is-mystery.html

Unemployment will fall to about 7 percent in the fourth quarter, according to economists at five of the world’s largest banks, creating more confusion among investors about the Federal Reserve’s bond-buying plans.

Fed Chairman Ben S. Bernanke said last month that the central bank could stop purchasing assets around the middle of next year when joblessness “would likely be in the vicinity of 7 percent.” Bank of Tokyo-Mitsubishi UFJ, Barclays Plc, Citigroup Inc., Deutsche Bank AG and UBS AG all predict the rate will be either at or just above that level in the fourth quarter, six months sooner than Bernanke projected.

“It will definitely pose more communication problems for the Fed,” said Drew Matus, deputy U.S. chief economist at UBS Securities LLC in Stamford, Connecticut, and a former analyst at the Federal Reserve Bank of New York. “And once again, those problems will be of its own making.”

Bond prices have dropped and market volatility has increased in the last six weeks as investors have struggled to figure out the Fed’s plans for its asset purchases. Prices will fall further during the next 12 months, as a faster-than-forecast decline in unemployment pressures the Fed into ending its program early, said Joseph LaVorgna, Deutsche Bank chief U.S. economist in New York.