WSJ: Jobs Report Doesn't Settle Debate About New Action
First Published Friday, 1st June 2012 09:02 pm - © 2012 Dow Jones
By Jon Hilsenrath
Of THE WALL STREET JOURNAL
Friday's dismal jobs report is sure to sharpen a debate at the Federal Reserve about whether to take new actions to spur economic growth, but it likely doesn't settle it.
Some Fed officials had started lobbying for more action before Friday's report that the unemployment rate rose in May to 8.2% and job growth slowed. Others have hesitated to move, but have held the door open to doing more if the economic outlook deteriorates.
One big question they face: Is the outlook actually worsening or have jobs data turned sour temporarily after stronger-than-expected improvements early in the year possibly driven by unseasonably warm weather?
"It could be that these weaker numbers could also be part of the seasonal adjustment pattern in the data," Sandra Pianalto, president of the Federal Reserve Bank of Cleveland, said in an interview with The Wall Street Journal.
Pianalto said she was still updating her forecasts for the economy. But she said Friday's report taken by itself wasn't likely to lead to "a substantial change" in her outlook and thus didn't change her view that the Fed should stand pat. She is in the camp of officials open to doing more if the outlook deteriorates, but not yet ready to do so.
Friday's report will provide ammunition to the activist wing of officials already prepared to act, though some officials might want to wait to see more data before making what would surely be a controversial decision to do more to spur growth.
(This story and related background material will be available on The Wall Street Journal website, WSJ.com.)
"It probably puts something on the table. Whether it is enough to pull the trigger is unclear," said Donald Kohn, a Brookings Institution scholar and former Fed vice chairman. He does see the outlook shifting. "On balance it certainly seems that the outlook relative to what the [Fed policy-making committee] has been looking for is going to be revised down."
Another question for the Fed: Whether more action will do much good. The Fed's main tool for spurring growth is interest rates, which it pushes lower when it wants to encourage more borrowing, spending and investment. But short-term rates are near zero and long-term rates have fallen sharply as investors flee other assets at a time of financial turmoil in Europe and slowing growth around the world. Yields on 10-year Treasury notes dropped to 1.467% Friday, the lowest going back to at least 1954, according to Tullett Prebon Information and FactSet Research Systems.
The Fed's next meeting is June 19-20.
Earlier this week, before the jobs data, New York Fed president William Dudley said he didn't see a reason for more stimulus measures, though he would be open to them "if the economy were to slow so that we were no longer making material progress toward full employment." Boston Fed President Eric Rosengren argued earlier this week more Fed action was already warranted.
The case for more action could be strengthened by worries at the Fed about the fallout from Europe's unstable fiscal and economic outlook. Moreover, recent data suggest inflation and inflation expectations are slowing, which gives the Fed more leeway to act.
At the very least, the jobs report is sure to convince Fed officials to stick to their plan to keep short-term interest rates near zero until at least late 2014. Pianalto said the jobs report reinforced her support for the Fed's decision in April to leave that low-rate guidance in place.
If officials do decide to act, the Fed has different options. One would be to extend its program called Operation Twist, in which the Fed buys long-term securities and sells short-term securities. The current $400 billion program ends in June. It could also launch a new program in which it buys long-term bonds with money it creates, rather than with cash it receives from selling short-term securities.