–QE3 Plus New Communication of Low Rates Ahead Seen Very Likely
By Steven K. Beckner
(MNI) – Friday morning’s weaker than expected August job figures
are widely seen as cementing the case for a third round of large-scale
asset purchases (“quantitative easing”) when Federal Reserve
policymakers meet next week.
Fed watchers anticipate that, at a minimum, the Fed’s Federal Open
Market Committee will use the “forward guidance” language in its policy
statement to signal an even longer period of zero short-term interest
rates. And most think the FOMC will go beyond that to approve some kind
of “QE3.”
Fed officials and analysts alike had been anxiously awaiting the
employment report to see if it showed a continuation of the stronger job
gains reported in July or a relapse into the meager ones of prior
months. That question was answered Friday with a resounding note of
disappointment.
The Labor Department reported that non-farm payrolls rose just
96,000 last month — well below the median forecast of 129,000 and far
below the 163,000 initially reported for July. What’s more, June and
July payrolls were revised down by a cumulative 41,000 — making the
total picture even weaker.
Although the unemployment rate ticked back down two-tenths to 8.1%,
the dip was attributable to a 368,000 plunge in the labor force — more
than twice as much as recorded in July.
Other aspects of the report were also on the weak side. Both
average hourly earnings and the average workweek were flat, and
manufacturing hours worked declined.
The data seemed to validate the concerns expressed by Fed Chairman
Ben Bernanke last Friday when he opened the Kansas City Federal Reserve
Bank’s annual Jackson Hole symposium by calling “the stagnation of the
labor market” a “grave concern.”
And the numbers seemed to confirm Bernanke’s Okun’s Law-based fear
that the economy is not growing fast enough to sustain sufficient
employment growth to reduce joblessness in a satisfactory way.
“Unless the economy begins to grow more quickly than it has
recently, the unemployment rate is likely to remain far above levels
consistent with maximum employment for some time,” he warned fellow
central bankers.
While saying the FOMC would have to weigh the benefits of
“nontraditional” easing against the costs, Bernanke called the costs
“manageable.”
Bernanke’s comments left in doubt whether QE3 would be deemed
necessary. But now, with the latest employment report seemingly
reversing previous progress, most Fed watchers believe the FOMC will
almost surely go ahead with a new asset purchase program — and not
merely tinker with its communication tool.
There will still be those, such as Richmond Fed President Jeffrey
Lacker and other non-voting presidents, who may argue that more easing
will not be effective in the face of non-monetary impediments to growth
and job creation.
But key policymakers who had been on the fence, such as Atlanta Fed
President Dennis Lockhart, now seem likely to join forces with more
determined advocates of additional monetary stimulus.
Wells Fargo chief economist John Silvia, after saying the jobs
numbers “have to be viewed as disappointing,” predicted the FOMC will
launch QE3.
The FOMC could “announce a program and implement it after the
election,” said Silvia, who declined to predict the amount of assets the
Fed wil purchase or over what time frame.
Various Fed officials have advocated that, unlike QE1 and QE2,
QE3 should be made more “open-ended,” with no pre-announced purchase
amount or ending date. And Silvia said that is a strong possibility.
Then, if the “fiscal cliff” is resolved and the economy springs to
life, the FOMC could back off of its asset purchases, but if it is not
resolved and the economy suffers, it could continue or even augment
its bond buying.
Silvia predicted the FOMC will also extend the expected period of
zero federal funds rates beyond “late 2014″ and indicate the Fed is in
it “for the long haul, because we’re not creating jobs for a much
longer period of time.”
He doubted the FOMC is ready to jettison the calendar date approach
in favor of a “reaction function” such as Chicago Fed President Charles
Evans’ proposed 7% unemployment/3% inflation threshold.
Barclay’s economist Michael Gapen also sees a QE3 being announced
next Thursday at the conclusion of two days of meetings at which FOMC
members will revise their economic projections and funds rate forecasts.
“Given the strong concern voiced by the chairman and other FOMC
participants about the need to improve conditions in labor markets and
the lack of improvement shown in recent months, we now expect the FOMC
to initiate a new asset purchase program next week and look for it to be
open-ended in nature and include both Treasury and agency
mortgage-backed securities,” Gapen said.
“Under such a program the committee would likely announce a monthly
purchase rate, or intermeeting purchase amount, and would seek to tie
the timing and pace of purchases to evolving economic conditions,” he
wrote, but “if the Fed were to decide against an open-ended program in
favor of a specific purchase amount, we expect them to state the
intention to purchase up to $500 billion with the program extending into
the first half of 2013.”
Not everyone is completely sold on QE3.
Joe Lavorgna, chief U.S. economist for Deutsche Bank, said “the Fed
is definitely going to do something,” but questioned whether the FOMC
will approve a third round of asset purchases.
Lavorgna predicted the FOMC will signal that it will keep the funds
rate near zero for a longer period, possibly indicating that it will not
raise rates until certain economic conditions or employment goals are
met.
He said he is still not convinced the FOMC will launch QE3. But he
described himself as being “slightly on the no QE” side and said his
position “could change.”
One approach would be for the FOMC to say that it will do QE3 at
the conclusion of the $267 billion “OPeration Twist” at yearend if the
economy has not imporved by then, said Lavorgna.
On Thursday, the European Central Bank announced that it will buy
the sovereign debt of euro-zone countries which have entered into a
program with the European Financial Stability Facility or the Euroopean
Stability Mechanism, setting off a big rally in the stock market. That
tends to work against the need for QE3 by improving financial market
stability and lessening Fed fears about European headwinds, Lavorgna
said.
** MNI **
[TOPICS: M$U$$$,MAUDS$,M$$CR$,MFU$$$,MGU$$$,MMUFE$]
