Bernanke’s Caution on Jobs Vindicated by Payrolls SlumpJoshua Zumbrun
Federal Reserve Chairman Ben S. Bernanke’s caution about the outlook for the labor market was vindicated by today’s report that U.S. payroll growth in March was the slowest in nine months.
The 88,000 increase, which was smaller than the most pessimistic forecast in a Bloomberg survey, gives Bernanke and his policy-making colleagues more reason to press on with $85 billion in monthly bond purchases aimed at reducing unemployment, said Julia Coronado, a former Fed economist.
“This validates their caution and keeps policy very much steady as she goes,” said Coronado, chief economist for North America at BNP Paribas in New York. “I can’t imagine they’d seriously consider tapering QE until much later in the year at the earliest, and that’s if all goes well,” she said, referring to bond purchases known as quantitative easing.
The Federal Open Market Committee in a March 20 statement said it will continue its asset purchases until the labor market improves “substantially.” Bernanke at a press conference that day called employment gains “modest” and said the FOMC wants to see “sustained improvement across a range of indicators,” including wages, jobless claims and the hiring rate.
The labor-force participation rate fell to 63.3 percent last month, the lowest since May 1979, the Labor Department said today. The decline in the labor force pushed down the jobless rate to a four-year low of 7.6 percent from 7.7 percent. Average hourly earnings stagnated while the average work week for all employees increased.
Bond yields declined and U.S. stocks fell, extending the biggest weekly drop of the year for the Standard & Poor’s 500 Index. The S&P 500 retreated 1 percent to 1,545.06 at 12:57 p.m. in New York, while the yield on the 10-year Treasury note fell 0.07 percentage point to 1.69 percent, the lowest since Dec. 11.
“It will be several months before we see any discussion about an imminent cutback in the pace of purchases,” said Dana Saporta, U.S. economist at Credit Suisse Group AG in New York. The FOMC last month affirmed its bond-buying plan “even in the face of better data,” she said. “They wanted to see if the job gains persisted -- in retrospect, a wise decision.”
In the six months before March, job gains averaged 197,000. The February unemployment rate of 7.7 percent was down from 8.3 percent a year earlier. Last month, initial weekly jobless claims fell as low as 334,000, the lowest since January 2008.
Federal Reserve Bank of New York President William C. Dudley voiced doubt about the durability of employment gains in a March 25 speech.
“The recent improvement in payroll employment growth, which gets much of the attention, is out-sized relative to the growth rate of economic activity that supports it,” Dudley said to the Economic Club of New York. “We have seen this movie before. When this happened in 2011 and 2012, employment growth subsequently slowed.”
Fed officials, including Dudley, have publicly debated the conditions that may cause them to reduce the pace of purchases.
Vice Chairman Janet Yellen yesterday became the latest policy maker to endorse a proposal by St. Louis Fed President James Bullard to reduce bond buying as the economy improves or expand it in response to signs of weakness. Fed officials have also discussed whether risks such as the emergence of asset price bubbles would warrant paring back their purchases.
“I don’t think the costs of QE are significant enough to induce them to slow down in the near term,” said Roberto Perli, senior managing director at the International Strategy and Investment Group in Washington, and a former Fed economist.
The FOMC probably won’t adjust its pace of purchases at their next two or three meetings, Perli said. “This is a reminder there might be some bumps along the road here, and so the cautious approach is probably the correct one.”
Private payrolls, which don’t include jobs at government agencies, climbed by 95,000 in March after a revised increase of 254,000 the previous month. Economists forecast they would grow 200,000 following an initially reported 246,000 gain in February.
The gains fall short of what Atlanta Fed President Dennis Lockhart and Chicago’s Charles Evans want to see.
Several months of job creation exceeding 180,000 and declining unemployment would mean “in the second half of the year or in early 2014 it would be appropriate to consider the tapering off,” Lockhart said yesterday during a panel discussion in Dayton, Ohio.
Evans, speaking on the same panel moderated by Kathleen Hays of Bloomberg Radio, said he’d like to see “200,000-a-month increases for like six months.”
Other labor-market indicators tracked by the Fed have also soured. The employment-to-population ratio, a measure singled out by Dudley in his March 25 speech, fell to 58.5 percent in March from 58.6 percent in February.
Boston Fed President Eric Rosengren is among policy makers who see the weak labor market as justification for sustained bond buying.
“If spells of unemployment have a persistent impact on income, wealth and home ownership, then a more aggressive response to persistently high unemployment rates is warranted,” Rosengren said today in a speech in Boston.
“Continued accommodative policy, such as continuing our asset purchase program through this year, is an appropriate response to labor market scarring,” he said.