By Peter Schroeder - 04/15/12 11:00 PM EDT
Disappointing jobs data is driving fresh speculation over whether the Federal Reserve might take extra moves to boost the economy.
If recent reports are an indication that the economy might be losing steam, the central bank could feel compelled to act with another policy move that could boost markets but also expose it and its chairman, Ben Bernanke, to even more political scrutiny.
And, on Thursday, data showed the number of people applying for new unemployment benefits had spiked to a two-month high.
While those two reports do not make a trend by themselves, they are driving concerns that the economic recovery could be losing momentum, similar to how early gains in 2011 turned out to be largely a mirage as the year progressed. That worry, in turn, is driving chatter that the Fed could feel compelled to step up to the plate and do more to salvage it.
“The data restarts a lot of discussion about whether or not the Fed needs to be more active,” said Andrew Busch of BMO Capital Markets.
“People are now definitely questioning whether the winter economic data is a bit of a mirage,” added Brian Gardner, the senior vice president of research at Keefe, Bruyette & Woods. “There is a sense of trepidation, anxiety about where the economy is going … I think quantitative easing is very much on the table.”
Even as the economy enjoyed a run of strong reports at the beginning of the year, the Fed sought to bring the figures back down to earth, warning that the recent gains had outpaced economic growth, suggesting the torrid pace would not keep up — a cautionary tone that appears to be confirmed by the new data. Bernanke in particular has repeatedly hit a fretful note on the plight of the long-term unemployed, who face longer prospects by the day of re-entering the labor force as skills and networks atrophy.
Following the disappointing reports, a number of top Fed officials hit the public speaking circuit, with some hinting that the Fed was open to new moves if a weak economy merits them.
Janet Yellen, the vice chairwoman of the Fed’s policy-setting team and an official whose opinion is thought to track closely with Bernanke's, said Wednesday that the Fed’s current policy is sufficient for now, but “further easing actions” might be needed if the recovery advances more slowly than expected.
Other Fed officials have said it is too early to reach a verdict on the economic trajectory, but will be watching the data closely.
Over the last two years, the Fed has taken a number of novel steps in its bid to drag the economy out of the recession. Beyond rock-bottom interest rates and two rounds of quantitative easing, wherein the Fed buys up billions in debt to further lower borrowing costs, it has also offered a specific inflation target, announced it expects to keep rates low through the end of 2014 and reoriented its portfolio to further lower borrowing costs in a move dubbed “Operation Twist.”
With that operation wrapping up in June, the Fed could be primed to take on another project if the economy looks iffy.
“The current program of the Twist ends in June, so you’re going to hear a lot more about this going forward,” said Busch.
Of course, it is possible the recent run of disappointing data could be a blip on the radar. Some argue that the exceedingly strong jobs reports beginning the year, buoyed by the mild winter weather, had to succumb to gravity at some point.
“Things weren’t going to stay as strong as they seemed early in the year, so it’s sort of according to script,” said Sara Kline, an associate economist with Moody’s Analytics. “It’s not an unexpected softening.”
If the bleak reports continue for the next few months and the Fed does decide to dust off the playbook, it will be providing fresh ammunition to the growing choir of Fed critics in Congress, who contend that those efforts to stimulate the economy are encouraging damaging inflation down the road.
The Fed has become a popular whipping boy ever since it took on a major role in handling the financial crisis, and its easy-money policies have been regularly criticized by Republicans for sowing the seeds of inflation.
But with the campaign season expected to bring congressional productivity to a screeching halt, the Fed might feel compelled to step up to the plate.
“Bernanke and others at the Fed have basically pleaded with Congress to do what it needs to do without being too specific on what exactly Congress should be doing,” said Gardner. “To the extent that government can grease the skids and get the economy moving again … the Fed is the only game in town.”