It’s agreed: The U.S. Federal Reserve is set to introduce new stimulus measures at the end of a two-day meeting of its policy committee on Thursday.
That was the message from Wall Street at the end of last week after the labour department said the U.S. economy created a disappointing 96,000 jobs in August, barely half of what’s needed to make a serious dent in the unemployment rate.
“It seals the deal for more easing from the Fed on Sept. 13,” wrote Nigel Gault, chief U.S. economist at IHS Global Insight.
Such certainty is rare for economists, a typically equivocal lot that like to hedge their bets. But along with Mr. Gault, Fed watchers at Barclays Capital, Toronto-Dominion Bank, Merrill Lynch, Capital Economics, Bank of Montreal and elsewhere all predicted with confidence that the Fed will take new steps this week to boost a sputtering economy.
To be sure, Fed chairman Ben Bernanke had given investors a fairly detailed road map. A week before the latest jobless figures, Mr. Bernanke told an economics conference in Jackson Hole, Wyo., that the situation in the labour market was “grave” and that the economy was “far from satisfactory.”
Mr. Bernanke’s tone reinforced the opinion that the policy setters on the Federal Open Market Committee were inclined to get back in the stimulus game. The Fed’s leaders opted against new measures in early August, but the minutes of that session later revealed that “many” committee members had said that steps would need to be taken “fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.”
The widespread expectation for more Fed stimulus is all about jobs. The central bank has two mandates from Congress: to keep prices stable and to achieve “maximum” employment. Inflation is safely contained. But when it comes to employment, the Fed is failing badly. Policy makers say maximum employment equates to an unemployment rate of 5.5 per cent or a little more. The jobless rate in August was 8.1 per cent – and it seems stuck there. After dropping from 10 per cent in October, 2009, to 8.3 per cent in January of this year, the unemployment rate hasn’t fallen below 8.1 per cent.
A few weeks ago, it looked like Fed officials could be facing a difficult decision at their September policy meeting. Economic data weren’t wowing anyone, but they indicated growth. The previous labour department report said non-farm payrolls grew by 163,000 in July.
But hope deteriorated quickly last week. A closely watched gauge of factory production showed manufacturing output declined in August. And on Friday, the labour department said it had overstated its July payrolls count by 22,000, dropping the number to 141,000. By no one’s definition is that indicative of the “substantial” economic growth.
“Not only does this report fail to meet the Federal Reserve’s criteria for a ‘substantial and sustainable strengthening in the pace of the economic recovery,’ it is downright dismal,” James Marple, a senior economist at Toronto-Dominion, said in a note.
All 19 members of the FOMC will revise their economic forecasts this week, and those then will be blended to create a new Fed outlook. It seems likely the Fed’s June prediction of growth of 1.9 per cent to 2.4 per cent this year will be revised lower, buttressing the case for new stimulus measures.
Most Fed watchers agree the central bank will extend its conditional promise to leave its benchmark interest near zero until at least 2014. The Fed minutes indicate that a majority of policy makers think doing so could help the economy, and Mr. Bernanke defended the efficacy of the extraordinary pledge in Jackson Hole.
There is less conviction on whether the Fed might opt to do even more. The big gun in the Fed’s arsenal is quantitative easing (QE), the creation of cash to buy bonds. A minority of policy makers are hostile to quantitative easing, and there is growing worry in academic circles that central banks are risking a new crisis by experimenting with largely untested tools.
But given the economy’s obvious weakness, few would be surprised if Mr. Bernanke persuades the policy committee to adopt a third bond-buying program. He’s already explained why it’s probably necessary.
“As we assess the benefits and costs of alternative policy approaches,” he said in Jackson Hole, “we must not lose sight of the daunting economic challenges that confront our nation.” He continued: “The stagnation in the labour market in particular is a grave concern not only because of the enormous suffering and waste of human talent it entails, but also because persistently high levels of unemployment will wreak structural damage on our economy that could last for many years.”