Ballew, Sohn Say Fed Statement Shows Focus on Job Creation

Paul Ballew, a senior vice president at Nationwide Mutual Insurance Co. in Columbus, Ohio, and Sung Won Sohn, an economics professor at California State University- Channel Islands, said the Federal Reserve’s statement today shows policy makers are focused on job creation.

The Fed today said it would maintain its $600 billion bond- purchase program and that its key interest rate would be kept low for an “extended period” to spur growth that has been “insufficient” to bring down unemployment. Donald Ratajczak, an economic consultant with Morgan Keegan & Co. in Atlanta; former Atlanta Fed research director Robert Eisenbeis; Jim O’Sullivan, global chief economist at MF Global Ltd. in New York; and Ward McCarthy, chief financial economist at New York Based Jefferies & Co. also spoke today.

Ballew:

“They’re certainly zeroing in on that particular issue: unemployment and lack of job creation.”

“The whole tone of the statement is to provide some justification for QE2,” or second round of quantitative easing that involves large-scale Treasuries purchases. “Time will tell whether or not QE2 is justified. QE2 is certainly being swamped by other developments, including the recovery in the economy and growth overseas. It’s a little bit of a different world than it was 120 days ago. There are clearer signs that the recovery is on more solid footing. The one weak point they’re continuing to call out is that we’re still not generating enough jobs yet.”

“All along the question is, ‘Are you pushing on a string through monetary policy?’ "

“Certainly, the Fed has an interesting hand to play next year, both in terms of the political side as well as the actual recovery does continue to gain some momentum next year, the Fed may have to pivot toward an exit strategy quicker than it planned. I expect with pretty strong critics taking over in Congress, that will be a variable out there they will have to think through.”

“We’ll see a Fed that will probably signal an exit strategy during the second quarter.”

“I would anticipate labor markets starting to accelerate in the first half. We will get an improving labor market in 2011, unless some unforeseen shock occurs. The question is, will it be fast enough?”

“The recovery is going into the next phase of healing.”

Sohn:

“The tone of the statement was more pessimistic than I thought it should be.”

“It’s true we’re not creating enough jobs to bring down unemployment, but the statistics show the economy is beginning to pick up some momentum.”

Still, “the poor job outlook is really the Achilles’ heel for them because the economy is not growing fast enough and inflation is not a concern at the moment. To some extent, they are having a difficult time getting any traction with monetary policy. You can take a horse to water, but you can’t make the horse drink. That’s the situation we’re in.”

On the other hand, higher bond yields are “one signal that the economy is actually improving so that’s good news for the Fed.”

“I don’t see the Fed going beyond QE2 next year if the economy does improve as most of us expect. I wouldn’t be surprised if they stopped short of the $600 billion if the economy improves better than they anticipate. The political flak they’ve been getting will make it less likely they go beyond the $600 billion program. But I expect economic, and not political, considerations to be the driver.”

Ratajczak:

“I understand why the Fed announced the quantitative easing: because they didn’t believe we would get any stimulus on the fiscal side. But now it appears we will get that, and as a result the Fed is now in a box.”

Eisenbeis:

“The statement really is saying that employment and pumping up growth is the priority and the rationale for QE2 still stands.”

O’Sullivan:

“The clear message is there is no rethinking of the program, no consideration of backing off.”

“Despite some better numbers on growth, they barely changed their tone on growth. Arguably they downplayed what have clearly been better growth data.”

“They reminded that the trend in inflation has continued to decline, consistent with no backing off the asset purchase program.”

McCarthy:

“They’re still firmly committed to an accommodative policy.”

“There’s very little change in this statement from the last one in terms of substance. They reaffirmed they’ll keep the funds rate low and continue to buy assets.”

“They’re still committed to the $600 billion of asset purchases.”

To contact the reporter on this story: Vivien Lou Chen in San Francisco at vchen1@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

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