Jobs rut tips scales in favor of Fed stimulus

Sun Sep 9, 2012 8:08am EDT
 
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By Pedro Nicolaci da Costa

WASHINGTON (Reuters) - The Federal Reserve looks set to launch a third round of bond purchases this week to try to drive borrowing costs lower and breathe more life into an economy that is not growing fast enough to lower unemployment.

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.

"The Federal Reserve will ease again," said Sung Won Sohn, an economics professor at California State University Channel Islands in Camarillo, California. "There are too many people without jobs and the unemployment rate is too high at this stage of an economic recovery."

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," said David Sloan, an economist at 4CAST Ltd.

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.   Continued...

 
A view shows the Federal Reserve building on the day it is scheduled to release minutes of the Federal Open Market Committee from August 1, 2012, in Washington August 22, 2012. REUTERS/Larry Downing