The Federal Reserve has made clear for months that it is leaning toward launching a fresh round of bond buying if the sluggish economy does not show signs of improvement. The Fed could be ready to act as early as this week. Last Friday’s disappointing jobs report will be one of the freshest indicators the 12 voting members of the Federal Open Market Committee will weigh when they convene on Wednesday and Thursday to set policy for the central bank.
The Labor Department reported last week that the economy added a mere 96,000 jobs in August—lower than even consensus expectations of a tepid gain around 130,000. The news raised expectations that the Fed would take action to boost the economy as soon as this week. After all, the bank has two mandates to promote: maximum employment and price stability. The latter is looking good. The former is not.
The FOMC will gather on Wednesday, and a decision is expected to be announced at 12:30 p.m. on Thursday.
Job growth has averaged under 100,000 for the last six months. Depending on whom you ask, that might not even be enough to keep pace with population growth. Fed Chairman Ben Bernanke expressed his “grave concern” over the stagnating labor market while delivering a speech at the central bank’s annual Jackson Hole, Wyo., meeting on Aug. 31.
A week after Bernanke’s remarks, the jobs report underscored that stagnation. Fed-watchers took note: Sixty percent of economists surveyed by Reuters after the August report think the Fed will undertake a third round of bond buying, or QE3, when it meets this week, up from 45 percent who expected it in a survey conducted on Aug. 24.
QE3 is just one of the bank’s options. The Fed may also extend the forward guidance on its key interest rate, in conjunction with or separate from a bond-buying program. The FOMC has said that it expects to keep the federal funds rate at rock-bottom levels through at least late 2014. Economists at Goldman Sachs predicted in an e-mailed research note last week that the bank will extend that guidance to mid-2015 or beyond. The bank could also tie the path of the funds rate more explicitly to the economy’s performance, giving investors greater certainty about when the rate will be raised.
Only a handful of economists think the bank will stand entirely pat and wait for additional data before moving forward. In Jackson Hole, Bernanke outlined the potential downsides of unconventional policy and noted that the bar for such action is higher than it is for traditional policies. But he also added that the costs of nontraditional policies “appear manageable” and that evidence suggests that the steps the central bank has taken "have been and can continue to be effective.”
No matter what the bank decides this week, Thursday’s midday policy announcement is sure to ruffle some political feathers. Democrats have been vocal in calling on the Fed to do more, and criticized it for failing to act while unemployment is high and inflation contained. Republicans have said that the bank has already gone too far, made monetary policy too easy, and risks running up inflation with any new action. Sen. Bob Corker, R-Tenn., put out a statement on Tuesday calling on the Fed chief to “show humility and make clear there are limits to what monetary policy can achieve” when the FOMC meets this week.
“If Chairman Bernanke announces more quantitative easing on Thursday, he will only be exacerbating the problem. Artificially lowering interest rates and printing more money will not solve our country’s structural economic issues,” said Corker, who is on the Senate Banking Committee.
With the election approaching, the political magnifying glass under which the bank’s actions are scrutinized will be even more powerful. If the FOMC decides to stay on hold, it has another chance to move at its next meeting in late October— less than two weeks before Election Day.