Despite political opposition and some internal dissent, economists said a weak report on jobs growth for August was likely enough to convince the U.S. central bank a looser monetary policy was needed.
Since the Jackson Hole Symposium, I've been thinking it is very likely that so-called "QE3" would be announced at the next FOMC meeting (Sept 12th and 13th). QE3 is shorthand for another Large Scale Asset Purchases (LSAP) program. "QE" is monetary policy, not fiscal policy (not spending).
The Fed will announce its decision at around 12:30 p.m. (1630 GMT) on Thursday.
The economy created just 96,000 jobs in August, well below expectations and less than what is needed to keep up with population growth, a government report showed on Friday.
While the jobless rate declined to 8.1 percent from 8.3 percent, that was only because Americans gave up the hunt for work in droves, further bolstering the case for more bond buying, or quantitative easing.
This is certainly a disappointing report and increases the odds for QE, which were already reasonably high.
In remarks late last month, Fed Chairman Ben Bernanke laid the groundwork for a third round of bond purchases, or QE3, by calling the stagnation in the labor market "a grave concern."
As part of any new bond buying, many economists think the Fed will return to the housing-related debt purchases it resorted to during the damaging 2007-2009 recession, perhaps buying a mix of mortgage-backed securities and U.S. Treasuries.
Some hope MBS purchases would drive mortgage rates lower and give an extra push to a housing sector that has shown some signs of life recently, boosting economic growth.
In response to the financial crisis and recession of 2007-2009, the Fed slashed interest rates to effectively zero and bought some $2.3 trillion in mortgage and government debt to push borrowing costs down and support growth.
With global growth slowing, central banks worldwide have been reviewing their options. The European Central Bank decided last week to wade into debt markets to push down borrowing rates for crisis-striken euro-zone nations, and Britain and China have also taken steps to open the monetary spigots.
Not everyone is certain the Fed is quite ready to commit to more bond buying, even though its policy panel will certainly consider such a move at its meeting on Wednesday and Thursday.
We expect the Federal Open Market Committee to launch another program of long-term securities purchases before the end of the year, focused primarily if not exclusively on mortgage-backed securities.
In a Reuters poll conducted after Friday's jobs numbers, economists gave a 60 percent chance to the Fed embarking on QE3 this week, up from 45 percent in a late August poll. Primary dealer banks, which do business directly with the Fed, saw an even stronger chance of asset purchases.
Many Fed watchers believe any new asset purchase program would be open-ended, unlike the past two cycles of quantitative easing. That would allow the central bank to review the size of its purchases on a frequent basis, perhaps meeting to meeting, and adjust the program as economic circumstances warrant.
Those who believe Bernanke still lacks a consensus for an additional aggressive monetary easing say officials might simply push into the future their guidance for the likely timing of an eventual interest rate hike. Since January, the Fed has said it was likely to hold rates near zero through at least late 2014.
While there have been some signs suggesting growth in the third quarter might be a touch stronger than in the second, economists widely agree the recovery is still too weak to do much to lower unemployment.
The Fed will release quarterly economic projections alongside its decision, and they could show officials taking a dimmer view of the future. Bernanke will also hold a news conference to explain any actions the central bank might take.
odds of QE3
The weak jobs report virtually guarantees the Federal Reserve will take some kind of action at its policy meeting next week, Jan Hatzius, Goldman Sachs’ chief economist, said on Friday.
The odds of QE3 at next week’s meeting are now above 50 percent, according to Goldman Sachs economist Jan Hatzius. But he conceded it won’t help improve the employment situation or do much to snap the economy out of its sluggish 2-percent trend growth
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