Labor Market Strengthens Bernanke’s Case for More Easing

Federal Reserve Chairman Ben S. Bernanke's case for further monetary easing was bolstered by figures showing widespread weakness in the U.S. labor market.

“It’s probably the straw that broke the camel’s back,” said Brian Jacobsen, who helps oversee $203.6 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin. “They wanted to act soon, and the data we have here doesn’t point to that substantial and sustainable improvement in the economy to justify sitting on their hands.”

Bernanke, who chairs next week’s Federal Open Market Committee meeting, may push for new bond purchases or an extension of the Fed’s pledge to hold the main interest rate near zero through at least late 2014, Jacobsen said.

Employers added 96,000 jobs in August, less than forecast by economists and down from a 141,000 increase in July, today’s Labor Department report showed. Average hourly earnings were little changed, and the unemployment rate unexpectedly declined to 8.1 percent from 8.3 percent as 368,000 Americans left the labor force.

Treasuries and gold surged, while the dollar slid and most stocks rose as investors increased bets the Fed will expand record stimulus at its Sept. 12-13 meeting. Today’s report also showed that the participation rate, which indicates the share of working-age people in the labor force, fell to the lowest since September 1981.

The results are “inconsistent with what the Fed wants to see, which is progress towards the natural rate” of unemployment, said Roberto Perli, a managing director at International Strategy & Investment Group Inc. in Washington and a former member of the Fed board’s division of monetary affairs. “If you create 100,000 jobs a month you don’t get there.”

Stimulus Warranted

Fed officials’ forecasts call for unemployment of 5.2 percent to 6 percent in the long run. At next week’s meeting, the Fed’s seven governors and 12 regional bank presidents plan to update their estimates for unemployment and other economic data, and Bernanke will hold a press conference.

At a July 31-Aug. 1 gathering, many members of the FOMC said additional stimulus would be warranted unless there was a “substantial and sustainable strengthening” in the economy, according to the meeting minutes.

In an Aug. 31 speech, Bernanke defended his unprecedented policies and laid out arguments for further action to combat unemployment, which he called a “grave concern.”

Additional stimulus may take different forms, including a third round of bond purchases, or quantitative easing, that would be “open-ended,” economists said.

Employment Mandate

“We think QE is definitely on the table because they’re failing on the employment mandate and there’s less worry about inflation,” said Yelena Shulyatyeva, U.S. economist at BNP Paribas SA in New York. “We also expect them to extend the forward guidance into 2015.”

Four of the Fed’s regional presidents have called for an “open-ended” approach, in which the central bank announces a pace of bond purchases continuing until the economy sufficiently improves.

“That might take the form of announcing a flow of purchases of securities per month” including both Treasuries and mortgage-backed securities persisting “for as long as appropriate,” San Francisco Fed President John Williams said in an interview last week at a Fed symposium at Jackson Hole, Wyoming. The Fed would “adjust this program as time goes on, either to increase it or decrease it, end it sooner or later, depending on how economic conditions develop.”

Boston Fed President Eric Rosengren and Chicago Fed President Charles Evans have also favored open-ended purchases. St. Louis Fed President James Bullard said last week that while he backs the strategy, he wants to see more economic data before taking action.

Gold Rises

The Standard & Poor’s 500 Index (SPX) rose 0.2 percent to 1,435.48 as of 1:43 p.m. Gold for December delivery rose to $1,740.00 from $1,705.60 yesterday. The yield on the 10-year Treasury fell to 1.65 percent from as high as 1.74 percent before the report.

The central bank’s asset purchases have drawn fire from Republicans, including presidential candidate Mitt Romney and House Speaker John Boehner of Ohio. The 2012 Republican platform calls for an audit of the Fed’s monetary policy.

Romney told the Fox Business Network on Aug. 23 that he wouldn’t reappoint Bernanke, raising questions about the succession more than a year before Bernanke’s term expires in January 2014.

Nudging Economy

Three years into the expansion, Bernanke has tried to nudge the economy onto a stronger growth path and boost hiring. The FOMC on June 20 extended a program, known as Operation Twist, replacing short-term notes in its portfolio with longer-term assets to bring down longer-term interest rates.

Most Fed analysts don’t believe the central bank will be influenced in its decision by the political calendar, according to a July 25-27 Bloomberg survey of 58 economists.

Sixty-five percent of those surveyed believe the Fed won’t take politics into account. Eighteen percent said the election makes the central bank more likely to act, while 18 percent said it makes them less likely.

Mohamed El-Erian, co-chief investment officer of Pacific Investment Management Co. in Newport Beach, California, said four data points in today’s Labor Department report are likely to prompt the Fed to act: job creation averaging less than 100,000 over the last three months, no growth in average hourly earnings, a decline in labor force participation and rising teenage unemployment.

Policy Triggers

“Put all that together and it triggers the need for a policy response,” El-Erian said in a Bloomberg Television interview.

The participation rate fell to 63.5 percent. The unemployment rate among teens climbed to 24.6 percent from 23.8 percent.

The data add to evidence the U.S. economy has weakened. Gross domestic product expanded at a 1.7 percent annual rate in the second quarter, slowing from 4.1 percent in the final three months of last year.

Cooling growth and weak job creation leave the world’s biggest economy more vulnerable to fallout from the debt crisis in Europe and the so-called fiscal cliff in the U.S., the $600 billion of tax increases and spending cuts that will take effect automatically at the end of the year unless Congress acts.

To contact the reporters on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net; Jeff Kearns in Washington at jkearns3@bloomberg.net

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

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