The disappointing May jobs report has set off a fresh round of speculation — and concern among Republicans — about whether the Federal Reserve will move to boost the economy.
Friday’s employment report, which found the economy added just 69,000 jobs — under half of what was expected — suggested that an already tenuous economic recovery might have lost steam.
“That’s the chatter,” said Andrew Busch of BMO Capital Markets. “At this point, they may be reassessing their outlook.”
Before Friday’s report, Fed officials indicated they were not looking to take on new initiatives.
William Dudley, the president of the New York Federal Reserve Bank and vice chairman of the Fed’s policy-setting committee, indicated Wednesday the Fed would not take more action if the economy continues a steady recovery.
“As long as the U.S. economy continues to grow sufficiently fast to cut into the nation’s unused economic resources at a meaningful pace, I think the benefits from further action are unlikely to exceed the costs,” he said.
However, he also noted further Fed easing “might be called for” if job gains are too slow. The question now is whether the May report meets that test.
Fed Chairman Ben Bernanke is likely to be tested on that front Thursday during a scheduled appearance before the Joint Economic Committee.
Republicans worry the Fed might read the report as a call to action.
“One of my fears is that the Fed feels an obligation to interject itself more into the economy, which I think is exactly the wrong thing,” said Rep. Kevin Brady (R-Texas), vice chairman of that panel. “I’m hopeful they don’t take this as a signal to intervene more.”
Since the economic crisis began, the Fed has taken a number of novel steps in its attempts to spur the recovery.
It has lowered interest rates to near zero, said it expects to keep rates there until the end of 2014 and embarked on two rounds of “quantitative easing” — huge purchases of long-term bonds in a bid to lower borrowing costs.
At the end of June, the Fed will also wrap up “Operation Twist,” in which it reoriented its portfolio to load up on longer-term securities. The action marked yet another effort to lower borrowing costs and spur lending.
Beyond adjusting interest rates, the steps taken by the Fed during the recovery have been uncharted territory for the central bank.
Each step of the way, Republicans have expressed concern that the Fed was overstepping its bounds and encouraging damaging inflation down the road.
In a rare move last September, GOP leaders in Congress wrote a letter directly asking the Fed, a politically independent institution, to steer clear of further attempts to boost the economy.
“I’m always concerned about what the Fed may do,” said Rep. Scott Garrett (R-N.J.). “They have, in my opinion, gone beyond their bounds.”
While the Fed was a popular punching bag during the GOP primary, Mitt Romney has steered clear of those jabs and offered kind words for the Fed’s role in addressing the financial crisis.
But even the party’s official standard-bearer is throwing cold water on the need for a third round of easing.
“The Fed’s stimulative effects have really run their course,” Romney said Friday on CNBC. “I don’t think we are looking for more … the right course is to have steadiness from the Fed.”
Further complicating matters for the Fed is that any steps it would take to boost the economy now would come in the middle of the heated campaign season.
With Republicans already skeptical of the Fed’s actions, any new attempt to spur the economy could be read as a political move favoring the White House.
“The Fed has historically kind of had a quiet period before any U.S. election,” said Busch.
“We’ll see if they can justify acting without looking completely political.”
John Canally, an economist for LPL Financial, said the May jobs report ups the odds the Fed might need to take action, especially if talk of a double-dip recession increases.
However, he and other economists have found some silver linings that suggest the Fed could stay on the sidelines.
While the headline number from May’s report missed the mark, separate figures show employment increased by 422,000 in May.
That higher number is based on a monthly survey of about 60,000 households, which is separate from the survey that generated the paltry 69,000 figure.
"The one bright spot in today’s report was that household employment rose a stunning 422,000 in May, after declines of 169,000 and 31,000 in March and April, respectively," Canally said. "This suggests that perhaps the labor market is not quite as weak as the payroll job count in May suggests.”
Mark Zandi, chief economist at Moody's Analytics, agrees that underlying job growth is probably around 150,000, more than double May's dismal figure. He suggested Friday’s miss could be an outlier.
"I really do think that underlying job growth is higher than this and we're going to see that in the coming months," he said.
If Zandi's estimate of growth bears out in the June jobs report, talk of Fed action is likely to fade again, even if the job market is less robust than many would like.
"Payback from the warm winter and other technical factors are weighing on the job numbers," Zandi said. "But having said this, underlying job growth has weakened since the beginning of the year.”
The threat of a growing crisis in Europe remains a potential hurdle to job growth this summer as its financial trouble weighs on the psyche of U.S. businesses.
May's numbers give Zandi the sense business people are skittish and nervous about Europe — a replay of the attitude when the economy slowed last spring.
"They've been through a lot. They've had a lot of near-death experiences in the last few years and I don't think you forget that. So if anything goes off the rails or off script — and Europe is certainly off-script — I think they pull back and I think that's what we're seeing," he said Friday.
"It's one of these things where it looks like the economy is going fine and it just hits a wall," Zandi added.
"It just seems to suggest that businesspeople are going to react very negatively to anything that isn't quite right, and Europe is certainly not right."
The Fed could avoid taking action if Europe doesn't unravel and policymakers in Washington are able to address pressing U.S. fiscal issues that have been weighing on consumers and businesses.
"If we do that I think we'll be OK," Zandi said. "Barring serious policy errors, the U.S. economy should be in full swing by this time next year."