Strong employment data may push Federal Reserve toward economic exit

Strong employment data may push Federal Reserve toward economic exit
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The Federal Reserve may make an early exit from years of economic support after a strong run of job data has painted a rosy picture of the recovery.

A strong employment report is buoying the case of stimulus skeptics, and the expectations of some Fed watchers, that the central bank could soon begin stepping back from its years of “quantitative easing.”

On Friday, the Labor Department reported that the economy added 203,000 jobs in November, as the unemployment rate fell to 7 percent from 7.3 percent. Those jumps were more than economists expected, and marked two straight months of strong gains for the labor market. One day earlier, the government reported the economy grew 3.6 percent in the third quarter of the year, up from an original estimate of 3.1 percent.

Fed Chairman Ben Bernanke said in June that when the Fed began slowing its stimulus, the unemployment rate would be “in the vicinity” of 7 percent, accompanied by “solid” economic growth. Now, some are wondering if the economy has met Bernanke’s conditions.

Charles Plosser, the head of the Federal Reserve Bank of Philadelphia and an opponent of the stimulus, pointed to the jobs report to justify an end to the Fed’s economic lifeline.

“With the economy doing what it’s doing, it’s probably time to figure out a way to gracefully exit from this,” he said on CNBC Friday. “We should be looking for ways to withdraw support or at least slow down the increase in accommodation in order to begin to let the economy stabilize on its own.”

And Bill Gross, who manages the world’s biggest bond fund at PIMCO, said the employment report means there are at least even odds the Fed will begin winding down the program at its next meeting, starting Dec. 17.

“It’s at least 50-50,” he told Bloomberg in a radio interview. “There was some logic for a January starting point, but it’s clear the Fed wants out.”

The Fed is currently engaged in its third round of the bond-buying quantitative easing. It is purchasing $85 billion of bonds each month in an effort to further lower borrowing rates. The central bank has said it is preparing to slow and eventually stop those purchases, but it needs to see significant improvement in the labor market first. The trillions of dollars in Fed purchases have helped push stock markets to record highs. It also has boosted concerns from Republicans about what could happen with inflation when it comes time to cut off the stimulus.

A solid economic recovery carries political implications as well. President Obama, with record low approval ratings after the rocky rollout of ObamaCare, would welcome signs of a strengthening economic recovery. And the economic picture will play a major role in the 2014 midterm elections as voters remain intensely focused on that issue.

That means that exactly when the Fed decides to trim down its stimulus, which markets have fretted over for months, could carry big implications in Washington.

Records from the Fed’s October meeting indicated that officials are preparing to slow their purchases “in the coming months,” so long as the economy continues to improve as expected.

However, there are others who are expecting several more months of Fed stimulus, even with the pleasant surprise on the employment front.

Skeptics say that they need to see more evidence that the run of good news can sustain itself, citing the potential for more fiscal drama in Washington to justify their cautious outlook. They also note that inflation remains in check, providing little urgency for the Fed to step back.

Mark Zandi, chief economist at Moody’s Analytics, said Friday’s report did not sway his expectation that the Fed will begin to taper the program in March.

“Policymakers will want confirmation that the stronger job growth is sustainable,” he told The Hill. “They also want to be sure that lawmakers don't engage in another round of damaging brinkmanship.”

Lawmakers will need to agree on another round of government funding by Jan. 15 to avoid another government shutdown. The debate over raising the debt limit will reignite in February, when a suspension of that borrowing cap included in the deal to end the shutdown expires.

It remains to be seen whether lawmakers will again engage in high-stakes battles, but the Fed may want to clear those hurdles before removing its backstop. The Fed stunned markets in September when it did not slow down the stimulus, and Bernanke pointed to the pending fiscal fights as a major reason to stay the course.

Charles Evans, the president of the Chicago Fed bank and a strong supporter of Fed policy, cautioned Friday that the latest jobs report may overstate the strength of the economy. He noted that most of the drop in the unemployment rate to 7 percent — the lowest rate since Obama was elected — came from people leaving the workforce, not finding jobs.

“The unemployment rate [drop] probably overstates the improvement in the economy,” he told Reuters. “Everything else equal, I would like to see a couple of months of good numbers.”

And while the headline number on economic growth was strong, economists noted that much of that gain came from businesses stockpiling inventory in preparation for upcoming consumer demand. Such stockpiling is not a sign of consistent growth and businesses could be forced to cut back in the future if consumer demand does not meet those increased supplies.