Editorial Board

It’s Too Soon for the Fed to Start Tapering

If the Federal Reserve needed further evidence that it should prolong its efforts to stimulate the U.S. economy, today’s jobs report provides it.

In mid-June, when the Fed set out plans to take its foot off the gas pedal by “tapering” its monthly bond purchases, the economy appeared to be on an upward trajectory. Employers were adding jobs at an accelerating pace, the ranks of the long-term unemployed were thinning, and the housing market was showing signs of life.

Now the encouraging spring is giving way to yet another . The Labor Department says monthly growth in nonfarm payrolls averaged a mere 148,000 over the past three months -- barely enough to achieve any significant reduction in the unemployment rate. The number of people who have been unemployed for more than six months ticked up again in August, renewing the threat that loss of skills and motivation will do permanent damage to the country’s productive capacity.

Meanwhile, the increase in interest rates triggered by the Fed’s tapering plans has cast doubt on the housing recovery. Mortgage applications for home purchase are down 9 percent since the end of May, according the Mortgage Bankers Association. New building permits for private housing slipped 3 percent from May to July.

In short, the risks that a smaller Fed stimulus will set back the recovery have grown. This is particularly true in view of the impending congressional battles over the U.S. debt ceiling (which could be reached by mid-October) and federal spending (which must be extended by the end of the fiscal year on Sept. 30) -- and their potential confidence-killing effects.

What, then, of the risk that added stimulus will stoke runaway inflation or create another financial bubble? According to the Fed’s preferred measure of inflation, the core price index for personal consumption expenditures, consumer prices are rising at an annual rate of only 1.2 percent, well below the central bank’s target of 2 percent. As regards froth in the market, the Fed in June largely disabused investors of the notion that the central bank will keep propping up asset prices indefinitely.

The Fed has always clearly stated that its stimulus efforts will depend on the changing outlook for the economy. When officials meet this month to set policy, we hope they’ll recognize that the outlook calls for a delay in tapering.