WASHINGTON (Dow Jones)--
By Luca Di Leo
A slightly rosier U.S. jobs picture relieves pressure
on the Federal Reserve to take immediate bold steps to spur the economy, such
as embarking on a third round of bond purchases, dubbed QE3.
Still, Fed watchers believe the weakness seen in the economy recently could
lead the U.S. central bank to take a small step as early as next week to try to
ease credit further.
"The job gains take a bit of the pressure off the Fed to act quickly," said
Randall Kroszner, a Fed board member until January 2009 who now teaches at the
University of Chicago Booth School of Business. "I don't see the foundation for
QE3 yet," he added.
Payrolls rose by more than anticipated in July and the unemployment rate
ticked down to 9.1%, the jobs report showed Friday, providing hope the U.S. can
avoid a recession. In recent days, fears that a new downturn could hit the U.S.
only two years after the one that followed the financial crisis has hit stocks
and added to pressure on policymakers to act.
The Fed, however, is wary of pulling the trigger too quickly on a new round
of bond buys to boost the economy and jobs. To do so, it wants to see prices
come down first. The most recent $600 billion purchases of U.S. Treasurys,
which ended in June, has brought most measures of inflation above 2.0%, a bit
above the Fed's comfort zone.
Donald Kohn, the Fed's No. 2 official until September 2010, said in an
interview this week that the central bank should consider a third round of bond
purchases only if inflation is coming down. While the Fed waits to see if the
weak U.S. economy will need QE3, Kohn listed other less potent options that may
ease credit further, even with interest rates already close to zero.
Some moves may be tried as early as Aug. 9, when the Federal Open Market
Committee meets to discuss policy, especially if more signs of economic
weakness emerge. The Dow Jones Industrial Average tumbled 512 points on
Thursday, its biggest point drop since Dec. 1, 2008. After opening higher on
the back of the positive jobs report, the stock market index was recently down
15 points in a volatile session.
One option would be for the Fed to state more clearly that its balance sheet,
which has ballooned as the central bank bought bonds, will remain big for a
long time. Another would be to lengthen the maturity of its Treasury holdings
to help keep borrowing rates low.
A third option would be to signal that rates will remain at a record low for
even longer than what is currently believed. Since 2008, the Fed has been
saying that it is likely to keep rates near zero for an "extended period."
Officials and market participants generally view that as meaning at least
several months.
Economists at Goldman Sachs said in a note Friday they expect the Fed to
expand the scope of their "extended period" language to cover not just the
exceptionally low level of short-term interest rates, but also the
exceptionally large balance sheet.
"It may not provide a big direct stimulus, but it would be a modest easing of
policy," Michael Feroli, economist at J.P. Morgan, said of the Fed's possible
move to give more guidance on its portfolio.
(Luca Di Leo, a special writer with Dow Jones Newswires, has been reporting
on global economic trends since 2000. A former European economics reporter and
Rome bureau chief, he now focuses on the U.S. economy and Federal Reserve. He
can be reached at 202-862-6682 or via email at luca.dileo@dowjones.com)
