The better-than-forecast U.S. payrolls report reduces pressure on Federal Reserve policy makers to add monetary stimulus when they meet this month without forestalling the need to act later, economists said.
“I don’t think this is going to provide a foundation for any major move,” on Sept. 21, former Fed Governor Randall Kroszner, a professor at the University of Chicago’s Booth School of Business, said in a Bloomberg Television interview.
The 67,000 increase in private payrolls in August reported by the Labor Department lowers the odds the nation will slide back into a recession while also reinforcing the view of Fed policy makers that that the economy is recovering more slowly than they would like. The Federal Open Market Committee may still consider a second round of large-scale purchases of securities, a strategy known as quantitative easing, this year.
“This could change the timing of QE2, but I think QE is on the horizon and should be on the horizon,” Paul McCulley, a portfolio manager and partner at Pacific Investment Management Co. in Newport Beach, Calif., which manages the world’s biggest bond funds, said on Bloomberg Television’s “In the Loop with Betty Liu.”
The increase in private payrolls in August exceeded the 40,000 median gain forecast in a Bloomberg News survey of economists. Overall employment fell 54,000 for a second month as the government fired census workers. The unemployment rate rose to 9.6 percent from 9.5 percent as more people entered the labor force.
A separate report from the Institute for Supply Management showed service industries in the U.S. expanded at the weakest pace in seven months.
The U.S. economy remains on a “gradual recovery track,” Atlanta Fed President Dennis Lockhart said in a speech in Johnson City, Tenn.
The Fed on Aug. 10 made its first move to shore up the recovery, deciding to reinvest principal payments on mortgage assets it holds into long-term Treasuries. Policy makers put a $2.05 trillion floor on the Fed’s securities holdings to prevent money from draining out of the financial system.
“I do not believe this change necessarily heralds the beginning of a period of further expansion of the Fed’s balance sheet,” Lockhart said Friday. The FOMC has three scheduled meetings left this year, with the final two sessions scheduled for Nov. 2-3 and Dec. 14 in Washington.
Lockhart also indicated the Fed could move in the other direction: “Nor do I think the decision precludes a return to a policy of allowing the balance sheet to shrink on its own.”
Fed Chairman Ben Bernanke said in an Aug. 27 speech that while the “preconditions” for a growth pickup next year are “in place,” the Fed was prepared to embark on more stimulus, such as asset purchases, if needed.
The payrolls data follow another report this week showing manufacturing expanded faster than forecast in August.
“The sense of urgency probably recedes to a great degree after not just this number but some of the numbers we’ve gotten over the last week or two,” said Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Conn., and a former Fed researcher.
Some central bank officials “would like to dig in against a further expansion of the balance sheet,” Stanley said, while Bernanke and other top policy makers “are quite dovish right now.”
Friday’s figures didn’t show the deterioration in the outlook that Bernanke suggested would be needed to trigger further easing. The Fed chief said the central bank would weigh the benefits against the costs of unconventional action after lowering the benchmark interest rate almost to zero in December 2008 and pledging since March 2009 to leave it there for an “extended period.”
Donald Kohn, who retired from the Fed Sept. 1 after serving as vice chairman, said in a CNBC interview broadcast that day that said the central bank’s decision to reinvest proceeds from maturing mortgage-backed securities won’t necessarily lead to additional stimulus.
“It’s not a signal of something to come,” Kohn said. “It is a signal that the outlook is not as good as it was in the spring.”
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