Fed Unlikely to Alter Course After Jobs Report
Friday's disappointing jobs report is likely to curb the Federal Reserve's recent enthusiasm about the U.S. economic recovery, but it seems unlikely on its own to convince officials they should alter the policy course Chairman Ben Bernanke laid out for the central bank in December.
That course calls for gradual reductions in its monthly bond purchases as the recovery picks up momentum, with an eye to ending the program this year. The Fed has been buying mortgage and Treasury bonds to hold down long-term interest rates in hopes of boosting economic growth.
"It takes a lot more than one labor-market report to be convincing that the trend has shifted," Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, told reporters after giving a speech in Raleigh, N.C., Friday. "In my experience one employment report rarely has an effect by itself on monetary policy."
The Fed's policy committee next meets Jan. 28-29. Officials will weigh then whether to reduce their monthly bond buys from $75 billion this month to $65 billion.
Mr. Bernanke suggested at his December news conference that the Fed's inclination is to reduce the purchases in $10 billion increments at every meeting in coming months.
Mr. Bernanke said in December, "If the incoming data broadly support the committee's outlook for employment and inflation, we will likely reduce the pace of securities purchases in further measured steps at future meetings." He added that the plan was not on a pre-set course and could be altered depending on new information.
Fed officials could decide to keep the program going longer than planned if evidence mounts that the economy isn't measuring up, as has happened several times before in an economic recovery that officially started in 2009. But other recent economic data have indicated a pickup in economic growth. The Fed tends to be an inertial institution, slow to change course until after evidence supporting a shift builds over time.
Still, the December employment report will likely put to rest for the time being any notion that the Fed might reduce the bond-buying program more quickly than planned because of robust growth.
"I've been pretty struck by the upbeat tone [in economic data] the past two months," San Francisco Fed President John Williams said in an interview with The Wall Street Journal earlier in the week. Fed Vice Chairwoman Janet Yellen, who becomes chairwoman Feb. 1, told Time Magazine she is expecting around 3% growth this year, which would be much better than in recent years.
The report was a reminder of the economy's past disappointments.
"Although consumption grew rapidly at the end of last year, we have seen similar surges since the last recession, only to see spending return to a more moderate trend," Mr. Lacker said.
The report exacerbated another conundrum for officials.
The jobless rate, at 6.7% at year-end, is falling largely because people are leaving the labor force, reducing the numbers of people counted as unemployed.
Because the decline is being driven by unusual labor-force flows—aging workers retiring, the lure of government disability payments, discouraged workers and other factors—the jobless rate is a perplexing indicator of job-market slack and vigor.
Yet Fed officials have tied their fortunes to this mast, linking interest-rate decisions to unemployment-rate movements. Since late 2012, the Fed has said it wouldn't raise short-term interest rates until after the jobless rate gets to 6.5% or lower. In December, officials softened the link, saying they would keep rates near zero "well past" the point when the jobless rate falls to 6.5%.
Most officials didn't expect that threshold to be crossed until the second half of this year. At the current rate, it could be reached by February.
The jobless-rate movement and the Fed's rhetoric create uncertainty about when rate increases will start. Short-term interest rates have been pinned near zero since December 2008, and officials have tried to assure the public they will stay low to encourage borrowing, investment, spending and growth.
Now, the public has more questions to consider: What does the Fed mean by "well past" the 6.5% threshold? Is that a year? A few months? How does it relate to the wind-down of the bond-buying program? What does it depend upon?
It will be Ms. Yellen's job to answer the questions. Mr. Bernanke's last day in office is Jan. 31.