Long-term rates may climb higher if the job market continues to improve. But that's not a reason for the Fed to worry. Click chart for more on bonds.
NEW YORK (CNNMoney) -- The strong January jobs report may finally put a nail in the QE3 coffin.
The Federal Reserve is still exercising caution when discussing the U.S. economy. Last week, it even suggested that it may need to keep short-term interest rates near zero until the end of 2014.
But if the job market keeps improving, there is absolutely no need for the Fed to launch another massive program to buy long-term bonds, a so-called third round of quantitative easing that is already being dubbed QE3.
Stocks surged Friday and bond yields rose as well. The market celebrated the fact that more jobs were added than expected last month and the unemployment rate slipped to its lowest level in nearly three years.
If the economy is really improving, the Fed should not still be in crisis mode. Buying more bonds to push 10-year rates, which even after Friday's spike are still below 2%, isn't necessary.
Bond yields should rise in a more robust economy since investors naturally would want to sell safe, boring assets in favor of more risky assets like stocks. (Rates rise when bond prices fall.)
"If we get more numbers like this, QE3 should be off the table. Any talk of a double dip recession should be long gone by now too," said Brian Gendreau, market strategist with Cetera Financial Group in Los Angeles.
"This report is a wake-up call. It should lead the Fed to re-evaluate their policy stance," he added.
And some experts said the market should even re-evaluate whether the Fed still needs to leave rates so low for another two years in light of the recent data. In other words, the low rates until end of 2014 pledge could turn out to be one of those proverbial promises that are meant to be broken.
"The Fed hedges a lot. Anything that the Fed does has to be subject to the economic data," said Alan Skrainka, chief Investment officer with Cornerstone Wealth Management in St. Louis. "People are taking the Fed statements as ironclad guarantees. They are not."
Still, don't expect the Fed to start singing about puppies and rainbows just yet. On Thursday, Fed chairman Ben Bernanke was still talking about how "frustratingly slow" the recovery was in a hearing before Congress. He also warned that the European debt crisis remains a key economic challenge.
"It doesn't feel as good as it sounds," said Neil Hennessy, CEO of Hennessy Advisors, a Novato, Calif.-based money management firm. Hennessy said he is fairly upbeat about the outlook for stocks and the economy, but conceded that there is still a certain degree of skepticism about the recovery and rally.
That nervousness could hold back consumer spending, which in turn, may cause companies to start reining in plans to hire even more workers over the next few months.
"The economy is out of the doldrums, but whether it's a really strong economy remains to be seen," Gendreau said.
That's a great point. Right now, it does not look like the Fed can justify announcing QE3. But what happens if the job gains suddenly lose steam? That's what happened last spring and summer, before the labor market picked up again at the end of the year.
If today's job euphoria turns into despair later this year, the Fed may still need to resurrect the notion of QE3 after all.
"The markets are hanging on every piece of data. The Fed can't put anything to rest yet," said Brett Hammond, senior economist with TIAA-CREF in New York. "We still can't be sure that the recent improvement is a long-term trend."
Best of StockTwits and reader comment of the week! Investors are excited. Perhaps the 2012 rally will turn out to be like another 1997 after all?
ReformedBroker: Today will be a Google over General Mills type of day, a Caterpillar over Kraft affair. Keep your heads, stay focused
sherowcap: Very good news for asset heavy, rate sensitive regional banks - QE3 is dead, not a moment too soon for them
I wouldn't abandon defensive sectors completely. The dividends still offer much more yield than Treasuries. But yes, it's nice to see more cyclical groups like tech, industrials, and yes, even financials, rallying.
Ktr8der: Does this rally have a "like" button?
Well-played. And speaking of Facebook, this week's top reader comment goes to a colleague over at CNBC. I tweeted Thursday about the latest earnings warning from retailer Abercrombie & Fitch ( ). "In non-$FB news, you have to wonder if Abercrombie & Fitch will soon be LBO target."
John Carney's response? "Too not-FB, didn't read."
Glad to hear. Have a good weekend, everybody. And by the way. Go Giants! ... even if it leads to another year for stocks like 2008!
The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.
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