A surprisingly strong performance from the labour market was the main reason why the United States Federal Reserve probably decided that it was time to start slowing down the pace of its monetary stimulus, economists from Nomura Bank said here on Monday.
They expect the Fed to start "tapering" its quanitative easing programme as early as September and latest by the end of the year, as economic indicators continue to point upwards.
In a report last month, the US Fed chairman Ben Bernanke and minutes from the Fed's meeting raised concerns that the Fed could slow down its monetary stimulus programme soon, which currently buys about US$85 billion (S$106 billion) of commercial debt a month.
That caused a spike in volatility in stock markets around the world, as fears mounted that the liqudity-fueled rally could come to a halt.
Nomura's US chief economist Lewis Alexander told investors at the bank's annual investment forum at the Ritz Carlton that a big part of the reason was the drop in unemployment despite the slow pace of economic growth.
"What's striking is that unemployment rate has dropped more rapidly than GDP growth had predicted," he said, citing an economic phenomenon known as "Okun's law". Okun's law describes the relationship between unemployment and GDP growth and says that the economy will need to grow beyond a certain pace for unemployment to fall.
"And this more than anything else is what is driving the change in Fed policy."