Bernanke Likely to Implement QE3 With Unemployment Over 8 Percent, Says Goldman Sachs


The U.S. unemployment rate for August retreated to 8.1% from 8.3% in July, even as the as non-farm payrolls added just 96,000 jobs for the month after adding 121,000 in July. It was expected that the country would add about 123,000 jobs. The drop in the unemployment figure was made possible by the 368,000 Americans who dropped from the labor force in August, more than was expected. The U.S. labor force participation rate for August was 63.5%, down from 63.7% in July. 

Then there is the U-6 unemployment figure, which unlike the U-1 (8.1%) figure includes those Americans who unemployed who have stopped looking for work, as well as those who are employed only part-time but are seeking full-time jobs. Interestingly, this number actually declined to 14.7% in August from 15% in July. 

The Mitt Romney campaign was quick to pounce on Friday's jobs data, saying in a release: "After 43 straight months of unemployment above 8%, it is clear that President Obama just hasn't lived up to his promises and his policies haven't worked. We aren’t better off than they were four years ago." 

The unemployment rate for millennials remained high, as 12.7% of 18 to 29 year olds were unemployed in August (non-seasonally adjusted). For millennial African-Americans the figure was 22.4%; 13.7% for millennial Hispanics; and 12.6% for millennial women.

These figures definitely are a mixed bag for the Obama administration. The president can point to the two-tenths of a point drop in the main unemployment rate, and the three-tenths of a point drop in the U-6 rate. Republicans meanwhile, will be able to note the fewer number of jobs created and the drop in the labor force participation rate. 

In the wake of the Bureau of Labor Statistics release, the analysts at Goldman Sachs believe that the enactment of a third round of quantitative easing by the Federal Reserve is a mere formality at this point:

Goldman says,

BOTTOM LINE: With today’s August employment report showing a nonfarm payroll gain of 96,000 and an unemployment rate of 8.1% because of a drop in the participation rate, we expect a return to unsterilized and probably open-ended asset purchases at the September 12-13 FOMC meeting.

1. We now anticipate that the FOMC will announce a return to unsterilized asset purchases (QE3), mainly agency mortgage-backed securities but potentially including Treasury securities, at its September 12-13 FOMC meeting. We previously forecasted QE3 in December or early 2013. We continue to expect a lengthening of the FOMC’s forward guidance for the first hike in the funds rate from “late 2014” to mid-2015 or beyond.

2. While there is significant uncertainty around the details of any new program, our base case is that QE3 will be formulated as an open-ended asset purchase program of around $50 billion per month, with an end date that is not given in advance but made dependent on progress in the economic recovery. We expect the criteria set for ending the program to be formulated in qualitative terms in the FOMC statement but explained in more detail in Chairman Bernanke’s press conference and in a statement from the New York Fed. We expect Operation Twist 2 to be continued until its scheduled completion at the end of 2012.

3. The return to asset purchases at this time is not a given. It is also possible that Fed officials will limit themselves to a lengthening of the forward guidance. In that case, we believe that they would try hard to find a way to not only lengthen the guidance but make this guidance more powerful by coupling it with a statement to the effect that “…a highly accommodative stance of monetary policy was likely to be maintained even as the recovery progressed.” It is even possible that the committee would adopt Chicago Fed President Evans’ proposal to signal no rate hikes until the unemployment rate has fallen to a specific level (in Evans’ version 7%) unless underlying inflation rises above a specific threshold (in Evans’ version 3%). But that is not our base case.