By Steven K. Beckner
(MNI) – A solid February employment report will make it difficult
for the Federal Reserve to justify further monetary stimulus in the
near-term, but additional quantitative easing at some point cannot be
ruled out, Fed watchers said Friday.
The Fed’s policymaking Federal Open Market Committee is unlikely to
announce further easing following its meeting next Tuesday, but a “QE3″
could come later, depending on the economy’s performance, analysts said.
The Labor Department announced that the unemployment rate stayed at
8.3% in February, despite a 0.2% increase in labor force participation.
It also reported a 227,000 non-farm gain, which was not only bigger than
expected but was accompanied by a 61,000 upward revision to prior
months’ payrolls.
Most of the job gains came in the service sector, but there was
also a 31,000 rise in factory payrolls. Construction employment was
down, apparently because of weather factors. Government jobs declined
again, but only by 6,000.
The index of aggregate hours was up 0.2%, average hourly earnings
0.1%.
The report was well-received on Wall Street and by economists.
“All this looks quite healthy,” said Dean Maki, chief economist for
Barclays Capital, who noted “we are in a pattern where revisions are
upward, not downward” and who predicted that the 227,000 figure will be
revised up as well.
Bank of America chief economist Mickey Levy called the job numbers
“strong” and “consistent with what other data seem to be telling us.”
“It’s the third month in a row in the establishment survey of
healthy gains,” said Levy, calculating that they reflected a 1.9%
annualized rate of economic growth even before allowing for productivity
improvements. He called employment increases in the household survey
“robust.”
Levy said “the economy is improving and is moving into that
self-sustaining mode.”
David Resler, chief economist for Nomura Securities, called the
February employment report “very encouraging” and said he was
particularly encouraged by the fact that increased labor force
participation did not increase the unemployment rate.
“I’m really elated to see this kind of increase” in payrolls as
revised upward, Resler added.
Wells-Fargo economist Mark Vitner was less enthusiastic, saying
“the numbers are good, but the quality is not great.” He said there are
“a lot of part-time and low-wage jobs, so we’re not getting a lot of
income.” He projected the unemployment rate will rebound to 8.5% and
“stay up there quite some time.”
As for the monetary policy implications, Fed watchers generally
agreed that the FOMC is unlikely to take new easing actions next week,
but left the door open to further easing down the road.
At the Jan. 25 meeting, the FOMC changed its “forward guidance” on
the path of the funds rate, extending the expected period of near zero
rates from “at least mid-2013″ to “at least late 2014.” The FOMC also
continued to push down on long-term interest rates through the
“Operation Twist” program of selling short-term and buying long-term
securities.
And the FOMC reaffirmed its policy of reinvesting principal
payments from its holdings of agency debt and agency mortgage-backed
securities in agency mortgage-backed securities and of rolling over
maturing Treasury securities at auction to prevent any shrinkage of the
Fed’s balance sheet.
Maki said “it’s difficult for the Fed to announce further easing
actions coming off reports like this. It’s difficult to say the labor
market is not improving fast enough.”
But Maki said he “wouldn’t rule out further easing down the road if
things soften.”
In recent testimony on the Fed’s Monetary Policy Report to
Congress, Chairman Ben Bernanke cast some doubt on the strength and
sustainability of employment gains.
“The decline in the unemployment rate over the past year has been
somewhat more rapid than might have been expected, given that the
economy appears to have been growing during that time frame at or below
its longer-term trend,” he said. “Continued improvement in the job
market is likely to require stronger growth in final demand and
production.”
But Maki said it is not uncommon for employment data to diverge
from GDP and that the decline in the unemployment rate and the downtrend
in jobless claims (until very recently) show “solid, but not spectacular
growth.”
“It’s difficult to look at these things and say the economy is too
weak,” he said.
Levy observed that the Fed is “putting much more weight on bringing
down unemployment” than on inflation. And he said Bernanke “knows the
economy is improving but has understated that to the public.”
But “if we get another three or four months of healthy employment
gains,” Levy said financial markets will likely “start expecting the Fed
to change its signal” on the timing of hikes in the federal funds rate
from the current zero to 25 basis point range.
Levy said the Fed would be “misguided” if it were to do additional
asset purchases at a time when past reserve creation may be on the verge
of becoming “more powerful.” But he didn’t exclude the possibility
“because this Fed is so dovish about doing anything necessary to bring
unemployment down.”
Resler said “the case for doing anything now is weak.”
“The economy seems to be generating some genuine momentum,” Resler
went on. “If we continue at this pace, talk of quantitative easing will
fade.”
“I don’t think they’ll need to do more,” he said. “Whether they
need to do more or not, I don’t think it will have much impact, and if
they do, I don’t think it will be very large in scale.”
Having said all that, though, Resler said the FOMC still has “a
strong bias for action” should unemployment rise again.
Vitner said that “on the surface (the jobs data) would make it
harder for the Federal Reserve to do something.”
Nevertheless, Vitner said he wouldn’t be surprised to see the Fed
buy more MBS in the Spring just “to stay ahead of the widening of
spreads” between MBS and Treasuries and give housing “more of a push.”
“They don’t want to be blamed if the recovery falls short,” said
Vitner, adding that QE3 could well be undertaken “to make sure it
doesn’t get short-circuited.”
** Market News International **
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