Bernanke Can Push QE by Saying Jobs Show Stimulus Gains
Federal Reserve Chairman Ben S. Bernanke can find two messages from a larger-than-forecast surge in job growth: his unprecedented stimulus is working, and the Fed should keep buying $85 billion in bonds each month.
Employment rose 236,000 in February for the third monthly increase above 200,000 in four months, pushing down the jobless rate to a four-year low of 7.7 percent, according to Labor Department data released yesterday.
“This is what proponents for QE were almost hoping for,” said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington, referring to bond buying known as quantitative easing. “This is very close to what they were expecting and consistent with sticking with QE for the whole year,” said Gagnon, a former associate director at the Fed’s division of international finance.
The job market still has far to go before achieving the substantial gains Bernanke has said will warrant halting purchases that have pushed the Fed’s balance sheet to a record $3.1 trillion, said Roberto Perli, a former economist at the Fed’s Division of Monetary Affairs.
Policy makers “will want to see confirmations of these numbers in the months ahead,” said Perli, managing director in charge of policy research at International Strategy & Investment Group in Washington. “You don’t look at just one employment report.”
Stocks and Treasury yields rose on signs the world’s largest economy is strengthening in the face of federal budget cuts and higher payroll taxes. The Standard & Poor’s 500 Index rose 0.5 percent to 1,551.18, within 1 percent of its 2007 record. Treasuries declined, pushing up the yield on the benchmark 10-year note by 0.04 percentage point to 2.04 percent.
Central bankers are debating how long to keep up the monthly bond purchases, weighing the potential benefits to 12 million unemployed Americans against the risks the untested tool may destabilize financial markets or eventually fuel inflation. The Federal Open Market Committee has said it is waiting for the labor market to “substantially” improve while not specifying a numerical trigger for an end to the purchases.
Among central bank officials, Chicago Fed President Charles Evans on Feb. 28 offered the most explicit guidance on the job gains needed before slowing and halting quantitative easing. He said he favors monthly job growth of 200,000 over a period of six months.
Bernanke said in April that the economy would need from 150,000 to 200,000 additional jobs per month for the unemployment rate to “decline gradually” at the rate that policy makers forecast at the time. Officials are looking for a “sustained” decline in unemployment over time even if those declines aren’t “rapid,” Bernanke said in September as he announced the open-ended bond-purchase program.
The February jobs report showed that hiring in construction jumped by the most in almost six years, while payrolls climbed at retailers and professional and business services such as temporary-help firms.
Fed Governor Elizabeth Duke said yesterday an improving housing market shows the asset purchases have been effective in bolstering the economy.
“Monetary policy has contributed significantly to the recent improvement in the labor market and thereby begun to ease one of the main sources of weak housing demand,” Duke said in a speech in Avon, Colorado.
Some Fed officials have questioned the need to keep buying at the current pace. Kansas City Fed President Esther George dissented from policy in January out of concern the stimulus would fuel the risk of financial instability, while Dallas Fed President Richard Fisher has repeated that monetary stimulus won’t help businesses hire.
St. Louis Fed President James Bullard said yesterday the central bank probably will press on with asset purchases as contained inflation expectations give it time to continue quantitative easing.
“It’s going to be a while on the QE program,” Bullard, a voting member of the policy making FOMC this year, said before the release of the jobs report during a television interview on “Bloomberg Surveillance” with Tom Keene and Mike McKee. “We’ve got a lot of room to maneuver here.”
Bernanke last month defended the Fed’s expansion of its balance sheet, noting the “meaningful, beneficial” impact from accommodation. Vice Chairman Janet Yellen echoed the message in a March 4 speech.
“We are getting some traction in housing” as well as in autos, investment, and commercial real estate, Bernanke said in Congressional testimony Feb. 27. “We do not see the potential costs of the increased risk-taking in some financial markets as outweighing the benefits of promoting a stronger economic recovery.”
Still, the share of working-age people in the labor force highlights weakness in the job-market recovery, said Diane Swonk, chief economist for Mesirow Financial Holdings Inc. in Chicago. The labor participation rate dropped last month to 63.5 percent, matching the lowest since September 1981, from 63.6 percent.
“The nature of the improvement is that the unemployment rate is not declining for the right reasons,” Swonk said. “The devil is in the details, and the details are this isn’t enough to remove accommodation or to stop expansion of the balance sheet.”
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