Unemployment Drop May Not Deter Fed from Carrying Out Stimulus

Unemployment Drop May Not Deter Fed From Carrying Out Stimulus


By Joshua Zumbrun - Feb 5, 2011 3:47 AM GMT+0800

The unexpected drop in the U.S. jobless rate reported today probably won’t dissuade Federal Reserve policy makers from carrying out their program to pump $600 billion into the economy, economists said. (My comments: They will pump till inflation hits past 4%).


U.S. central bankers are deemphasizing the unemployment rate and are taking a broader look at the health of the labor market, said Vincent Reinhart, the Fed’s chief monetary policy strategist from 2001 until September 2007. That gives them flexibility to alter their easing program in response to changes in other indicators, including payroll growth, he said.

Chairman Ben S. Bernanke said yesterday he needs to see “a sustained period of stronger job creation” before he deems the recovery firmly established. The Fed’s Jan. 26 statement said the recovery “has been insufficient to bring about a significant improvement in labor market conditions,” expanding its focus beyond the jobless rate. (My comments: QE3 until 2012?)


“They shifted their rhetoric because they don’t want to be hung out on the unemployment rate,” Reinhart said.

Unemployment in January fell to 9 percent, the lowest level since April 2009, the Labor Department said today. The drop from November’s 9.8 percent rate represented the biggest two-month decline since 1958.

The drop in unemployment probably isn’t enough to satisfy Bernanke and most of his colleagues, said Roberto Perli, who until July was a member of the Fed Board’s Monetary Affairs Division staff.

Among the indicators that may give them pause: Employers added fewer than 100,000 workers to payrolls a month on average last year, the labor force participation rate has fallen to the lowest level since 1984, and 6.2 million people have been looking for a job for more than half a year.

Job Creation

“It seems to me that we’ve got at least 12 months ahead of us before the Fed feels comfortable in terms of a sustained period of job creation because that’s really what they require,” Bill Gross, manager of the world’s largest bond fund at Pacific Investment Management Co., said in an interview today on “Bloomberg Surveillance” with Tom Keene.

“Unless we see that sustained level, that virtuous circle that basically he spoke to, the Fed’s not going to raise interest rates,” he said.

Employment rose last month by 36,000 workers, the smallest gain in four months, after a 121,000 rise in December that was larger than initially reported.

“An employment report like this is a Rorschach test,” said Reinhart, now a resident scholar at the American Enterprise Institute in Washington.

Quantitative Easing

Fed officials who want to end the Fed’s program to buy $600 billion in Treasury securities through June will point to the unemployment rate as a justification, he said. Advocates of the program, called quantitative easing, will point to payrolls.

Joblessness rose above 9 percent in May 2009, beginning the longest period of unemployment at that level or higher since monthly records began in 1948.

Revisions to previous unemployment reports showed the economy lost 8.75 million jobs as a result of the recession. For all of 2010, the U.S. added about 909,000 jobs.

In November policy makers expected the unemployment rate to fall to 8.9 percent to 9.1 percent in the fourth quarter of 2011. Average hourly earnings rose 0.4 percent in January, the highest since November 2008.

Bernanke said yesterday in a speech in Washington that job gains at companies last year “were barely sufficient to accommodate the inflow of recent graduates and other new entrants to the labor force and, therefore, not enough to significantly reduce the overall unemployment rate.”

Several Years

“With output growth likely to be moderate for a while and with employers reportedly still reluctant to add to their payrolls, it will be several years before the unemployment rate has returned to a more normal level,” Bernanke said.

Central bankers likely remain wary about improvements in the jobless rate as other aspects of the employment report, such as the labor force participation rate, remain grim, James Glassman, senior U.S. economist at JPMorgan Chase & Co., said today on “Bloomberg Surveillance.”

“If you’re sitting at the Fed, you’re not going to be happy with this kind of trend because it’s yet another indirect sign that there’s not enough going on in the job market to keep people in or pull people in,” Glassman said.

-- With assistance from Bob Willis, Alex Kowalski and Shobhana Chandra in Washington and Tom Keene in New York. Editors: James Tyson, Christopher Wellisz

To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net.

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net .