By Steven K. Beckner
(MNI) – Seldom has a monthly employment report carried as much
significance for monetary policy as the one which the Labor Department
will release Friday morning.
Weaker than expected August jobs data — or even numbers that fall
short of what was reported in July — could well clinch the case for
approving additional monetary stimulus when the Federal Reserve’s
policymaking Federal Open Market Committee convenes for two days of
meetings next week.
At the very least, the FOMC seems likely to use its “forward
guidance” on the path of the federal funds rate — its “communication
tool” — to convey an even longer period of near zero short-term
interest rates. And depending on the tone of the report, the FOMC might
also launch a new program of asset purchases or “quantitative easing” to
push down long-term rates.
Thursday’s decision by the Fed’s sister central bank, the European
Central Bank, to buy the sovereign debt of troubled euro-zone member
nations will undoubtedly be discussed next Wednesday and Thursday, but
will have much less influence on the FOMC’s decision, MNI has been told.
MNI is also advised that the FOMC’s own policy action won’t hinge
solely on the employment report, but rather on a whole series of
economic developments going back months.
Still, there’s not much question that Friday morning’s data will
weigh heavily on the Committee.
“We have one more data point to go,” Atlanta Federal Reserve Bank
director of research David Altig told MNI at the Kansas City Fed’s
recent Jackson Hole symposium.
Altig, top advisor to the Atlanta Fed’s voting president Dennis
Lockhart, said that “if things get softer, it (the policy decision) is
easy. If the economy keeps on the course its on it’s a lot closer.”
The July employment report, which was released shortly after the
FOMC’s last meeting, showed a surprisingly large 163,000 rebound in
non-farm payrolls which Lockhart and others called “encouraging.”
This followed a string of decelerating payroll gains — 143,000 in
March, 68,000 in April, 87,000 in May and 64,000 in June — which in
turn followed much stronger gains in the December 2011 to February
2012 period.
But the July report was not entirely encouraging. The unemployment
rate ticked up a tenth to 8.3%, as employment declined by 195,000, and
labor force participation fell by 150,000 after rebounding for two
months. Average hourly earnings rose just 0.1%, following a 0.3% June
gain, and the average work week remained unchanged at 34.5. The
aggregate hours index inched up 0.1%, following a 0.4% rise.
The FOMC, which may have had some inkling of what the July report
would show, stayed on hold Aug. 1. Committee members wanted “more time”
to “evaluate the effects” of their June 20 decision to continue the
“Maturity Extension Program” or “Operation Twist” and buy another $267
billion of longer term securities through the end of this year,
according to the minutes.
But the FOMC incorporated a stronger easing bias in its Aug. 1
policy statement, saying, it “will closely monitor incoming information
on economic and financial developments and will provide additional
accommodation as needed to promote a stronger economic recovery and
sustained improvement in labor market conditions in a context of price
stability.”
And when the minutes were released three weeks later, they seemed
to suggest an even greater inclination to ease further: “many members
judged that additional monetary accommodation would likely be warranted
fairly soon unless incoming information pointed to a substantial and
sustainable strengthening in the pace of the economic recovery.”
Fed Chairman Ben Bernanke made clear that soft labor market
conditions are uppermost in his mind in his keynote address to the
Jackson Hole symposium last Friday.
Bernanke called “the stagnation of the labor market” a “grave
concern.” And he reverted to the kind of Okun’s Law observations he was
making earlier in the year, when he questioned whether sizable payroll
gains could continue if the GDP growth pace did not accelerate.
“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.
Bernanke did not echo the “substantial and sustainable
strengthening” standard for refraining from further easing, fellow
officials noted. But he left no doubt he wants to see a continuation of
the kind of payroll gains reported for July, if not better.
A reversal of the July job gains, even a partial one, would
strengthen the hand of those arguing for a third round of quantitative
easing.
Bernanke has said that, at prevailing rates of labor force
participation, a 100,000 average monthly payroll gain is sufficient to
absorb new entrants to the labor force. Anything less than that would
clearly be unsatisfactory. But even a shortfall from the July gain would
be a disappointment.
Indeed, some FOMC members would likely argue for QE3 if the payroll
increase does not exceed 163,000.
The median forecast of Wall Street economists surveyed by MNI is
for a 129,000 rise — much better than the 90,500 average of March
through June, but not nearly enough to make the kind of progress
reducing unemployment that the FOMC majority would like to make.
Of course, everyone on the FOMC would like to bring down
unemployment.
As Dallas Fed President Richard Fisher, one of the FOMC’s biggest
hawks, recently told MNI, “we still have excessive unemployment. I’m not
worried about inflation right now. I’m worried about putting people back
to work.”
The difference between Q.E. skeptics like Fisher and many of their
colleagues is that the latter think more quantitative easing, coupled
with extended forward guidance, will actually help reduce unemployment.
** MNI **
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