By Steven K. Beckner

(MNI) – When Federal Reserve policymakers meet over the next two
days to reassess the stance of monetary policy, the Federal Open
Market Committee members will be considering the economic outlook, not
just what has already transpired.

As key as recent economic data are, the FOMC’s prognosis will be
just as important, if not more so.

And so the FOMC’s quarterly exercise of developing three-year and
longer-run economic projections and federal funds rate forecasts will
play a big role in determining what more the Fed should do to support
economic growth and reduce unemployment.

The combination of past economic behavior and future performance
seems likely to culminate on Thursday in an announcement of additional
Fed easing — on top of the $267 billion bond buying program already
underway in “Operation Twist.”

To be sure, Friday’s weaker than expected August employment report,
with its meager 96,000 non-farm payroll rise, 41,000 downward revision
to prior months and 368,000 plunge in labor force participation, will
weigh heavily on FOMC deliberations over the next two days.

The report served to validate Fed Chairman Ben Bernanke’s
expression of “grave concern” about “the stagnation of the labor market”
at the Kansas City Federal Reserve Bank’s Jackson Hole symposium the
previous Friday.

It wasn’t just that the August data were disappointing. A
one-month dip might be borne with equanimity.

More importantly, especially for undecided FOMC voters like Atlanta
Fed President Dennis Lockhart, Cleveland Fed President Sandra Pianalto
and others, the August payroll collapse seemed to constitute a relapse
to the kind of paltry job gains seen in the spring and early summer.

The August employment report is sure to be viewed, not in
isolation, but in a context that stretches back months.

As the year started, the labor market seemed to be on the mend.
From December through February, payrolls rose an average 245,000 per
month. But a skeptical Bernanke warned in March that “further
significant improvements … will likely require a more-rapid expansion
of production and demand.”

Bernanke’s fears that the economy wasn’t growing fast enough to
sustain those kinds of job gains and reduce unemployment were soon
realized. In March, payroll gains dipped to 143,000 and then decelerated
even more sharply — to 68,000 in April, 87,000 in May and 45,000 in

The July employment report, released a couple of days after the
FOMC decided on Aug. 1 to stay on hold and take “more time” to assess
the impact of the renewed “Operation Twist” bond-buying program, was
seen as “encouraging” by Lockhart and others who were uncertain about
whether more easing.

Together with stronger retail sales, housing activity and other
signs, the first-reported 163,000 July rise in non-farm payrolls
provided a ray of hope that the economy was showing some of its old
resilience, notwithstanding drags from Europe and the “fiscal cliff.”

Determined proponents of a third round of large-scaled asset
purchases (“quantitative easing’), such as Chicago Fed President Charles
Evans, continued to press for QE3. But others wavered.

Then, hopes were dashed when the Labor Department revised the July
job gain down to 141,000 and announced that in August payroll gains had
slipped back below the 100,000 minimum which Bernanke has said are
needed to absorb new entrants into the labor force at current rates of
labor force participation.

In a larger context, the August report seemed to reinstate the
pattern of subpar job gains that prevailed from March through June. It
seems likely also to affect policymakers’ calculations of the future.

If the FOMC convinces itself that the labor market outlook won’t be
much better without more monetary stimulus, then the case for aggressive
easing will be all the stronger. Then the FOMC may decide not only to
use forceful “forward guidance” on short-term interest rates but also a
QE3 program to push down long-term rates.

All 19 Fed presidents and governors will participate in revising
their Summary of Economic Projections and funds rate forecasts. The
result is not likely to be cheerful — just as the SEP released on June
20 was less optimistic than the one released on April 25.

In June, Fed presidents and governors marked down their forecasts
for GDP growth to 1.9% to 2.4% in 2012 (down from 2.4% to 2.9% in
April). Next year, they expected growth of 2.2% to 2.8% (down from
2.7% to 3.1%). And in 2014, the forecast was for 3.0% to 3.5% growth
(down from 3.1% to 3.6%).

With slower growth would come higher unemployment, FOMC
participants anticipated in June. The unemployment rate was seen at
8.0% to 8.2% for the fourth quarter of this year (down from 7.8% to 8.0%
in April). In the fourth quarter of 2013, unemployment was projected at
7.5% to 8.0% (down from 7.3% to 7.7%).

Slower growth and greater slack was seen reducing inflation
pressures. Both the overall and core inflation forecasts were reduced.
The officials projected 1.2% to 1.7% PCE inflation in the fourth quarter
of this year (down from 1.9% to 2.0%).

In June, as two new Fed governors joined the FOMC, six, rather than
four, officials expected the first funds rate hike to be delayed until
2015, and 11 officials expected the funds rate to be 75 basis points or
less at the end of 2014. By contrast, in April 9 officials expected the
funds rate to be 1% or less at the end of 2014.

The maximum funds rate level that anyone expected was 3%, and only
one person expected it to be that high.

To the extent FOMC participants further mark down their forecasts,
the size and scope of Fed easing will tend to swell.

** MNI **

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