What's a central banker to do? Bernanke mulls more QE - Photo credit: Wikipedia  The August jobs report left a bittersweet taste. While the number came as a disappointment, substantially under analysts’ expectations, the politically and psychologically important unemployment rate ticked down to 8.1%. All eyes are now on Fed Chairman Ben Bernanke, who made the case for further easing, but may not unleash QE3 at next week’s FOMC meeting; rather, he will probably extend the forward rate guidance, according to Nomura.  Market reaction was mixed. A day after ECB chief Mario Draghi unleashed a stimulative bond-buying program, gold surged on expectations of further easing from the world’s central banks, reaching $1,742.80 an ounce. U.S. stocks were flat while the yield on 10-year Treasuries slid to 1.62%.  Clearly, the 96,000 jobs the economy added in August was a disappointment, as analysts expected about 130,000. Making matters worse, the fall in the unemployment rate (which stood at 8.3% in July), was in great part due to a further decrease in the labor participation rate, which ticked down to 63.5%, according to Nomura.  While “job growth [isn’t] weak enough to suggest the economy is falling off a cliff,” wrote Nomura’s economic research team, “today’s reported 96k increase in nonfarm payrolls confirmed the view that economic activity has not been sufficiently strong to produce necessary job gains for the Fed to meet its employment mandate.”  Despite the disappointing number, there were a few bright spots in the report. While the Bureau of Labor Statistics downwardly revised the last couple of jobs reports by 41,000, average monthly job growth for the third quarter was 119,000, according to Jim O’Sullivan of High Frequency Economics, which is substantially better than the meager 67,000 we saw in the second quarter, when markets fell off a cliff. “The data will encourage the FOMC to act again at next week’s meeting,” O’Sullivan added.  Utilities added 9,000 jobs in August, mainly because of the return of ConEd workers after a labor dispute, while the leisure and hospitality business added 34,000 jobs. But manufacturing employment fell by more than expected (down 15,000 compared with a 10,000 expectation), while the auto business shed 8,000 jobs (despite a strong month for General Motors, Ford, and Chrysler, as Steve Schaefer reported).  Most analysts seem to agree the Fed is ready to do something. What appears clear, also, is that the threshold for unleashing a third round of quantitative easing doesn’t seem to have been reached. In his Jackson Hole speech, Ben Bernanke defended monetary stimulus, saying QE added more than 2 million jobs and helped push GDP up by 3%. The Chairman told investors and economists that he believes QE still has more to give, essentially priming markets for QE3, suggesting it’s now just a matter of time.  Analysts at Nomura are calling for the Chairman to extend the forward guidance in next week’s meeting. Bernanke also defended the Fed’s communication strategy, which in his eyes has an easing effect similar to the one more traditional monetary instruments have. The Fed could, for example, promise to keep rates at record lows until at least 2015, thus giving markets one more year of cheap money and loose monetary policy. QE3, Nomura’s economics team believes, will come, but later.  Central bankers are doing everything they can to support the global economy. The Fed has already expanded its balance sheet to epic proportions, while on Thursday ECB chief Mario Draghi announced a third bond buying plan that should help push down the borrowing costs of struggling peripheral nations, particularly Spain and Italy. While economic activity continues to lag, Bernanke and Draghi are using monetary tools to stimulate aggregate demand and aver catastrophic scenarios. With inflation expectations well anchored, at least in the U.S., it seems like Bernanke will do even more, the question now is: when?
The economy added a meager 96,000 jobs in August, well below expectations and priming markets for what seems to be another round of QE by Bernanke and the Fed. But quantitative easing probably won't come in the September meeting, rather, it could be an extension of the Fed's forward rate guidance to 2015.