New Job Numbers Mean More QE From the Fed


In the past week or so, several board members of the Federal Reserve have come out and dropped anvil-sized hints that the Fed is considering slowing its quantitative easing (QE3) program as soon as this summer, with the policy ending altogether by the end of the year. "Assuming my economic forecast holds true, I expect we will meet the test for substantial improvement in the outlook for the labor market by this summer," said John Williams, president of the San Francisco Fed.

It is rather unlikely, then, that Dr. Williams' economic forecast allowed for employment number such as the latest March ones (it did not). Economists expected the economy to add around 200,000 non-farm jobs. Instead, it only added 88,000. Unemployment, on the other hand fell by 0.1%, from 7.7% to 7.6%. As I mentioned a month or so ago, part of the reason unemployment rose in January was because a large number of people were returning to the labor market, and again seeking work. In March, however, the number of people in the labor market dropped by some 500,000, and the labor force participation rate fell to 63.9%, a 44-year low.

Thus it is clear the economy is not performing the way it has been to. While employment increased in professional and business services and constructions, manufacturers and retailers cut employment. According to Diane Swonk, an analyst at Mesirow Financial, job losses were concentrated in areas affected by unseasonably cold weather. "Retailers who couldn't sell spring merchandise decided to lay off workers and are now offering discounts," Swonk writes. "Building and garden stores cut workers as spring planting and lawn work was delayed; and, manufacturing lost jobs in the textile, apparel and food categories."

Regardless of the cause, such poor job numbers serve as a strong indication that the recovery, despite robust market performance, has been fairly halting and stop-and-go, and relatively unpredictable. Thus the hints dropped by Fed members, who were dependent on these now-off job predictions, are premature. It would be inadvisable to begin a drawdown in such a volatile situation. As I said in an earlier piece about QE3:

There is the threat of bad assets on the Fed’s books. If the U.S. government were to default, even in the case of a technical default (which would almost certainly result in more credit ratings agencies downgrading the U.S.), the value of Treasuries would drop, and the Fed would be forced to purchase at a loss.

If the market were to be jittered, default or no default, it could cause another downturn in the housing market, causing another wave of foreclosures and MBS failures — which is what fuelled the recession in the first place. The purchase of Treasury bonds is a typical part of the Federal Reserve’s monetary policy arsenal. What is unconventional about QE is the purchase of MBSes, and a failure of those would leave the Federal Reserve with bad, unloadable assets.

The market has been jittered by these numbers--as of Friday midday, the Dow was had fallen 106 points.  Even if the Fed were not to terminate QE3 immediately (which it would not in any case) it would be irresponsible to begin a draw down in light of these current numbers.