Jobs data has Bernanke back in spotlight

Another disappointing jobs report has intensified speculation that the Federal Reserve may take further steps to boost a staggering economic recovery.

The politics of such an election-year move, however, would be volatile, and would surely attract criticism from Republicans who are seeking to deny President Obama a second term. 

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On Friday, the Labor Department reported that the U.S. added just 80,000 jobs, as the unemployment rate remained stuck at 8.2 percent. The figure came in below expectations, and is too low to keep up with population growth, let alone cut into a jobless rate that hampers Obama's re-election bid.

The report, combined with a number of other gloomy economic reports, suggests that Fed Chairman Ben Bernanke may have little choice but to try and do more to fulfill the Fed’s legal obligation to maximize employment, whether it be a third round of massive bond purchases known as "quantitative easing" or another novel step.

“He should have the proof he wants to have [to act],” said Axel Merk, president and chief investment officer at Merk Investments. “I think he’s going to think very hard this weekend and then he’s going to try and get his other buddies on board.”

In June, Bernanke said the central bank stands ready to act, and that he will be looking primarily at the jobs reports for indications on how to proceed.

“If we don’t see continued improvement in the labor market, we’ll be prepared to take additional steps if appropriate,” he told reporters following its last policy meeting.

Bernanke was appointed to his high-profile post by President George W. Bush and later renominated by Obama in 2009. Mitt Romney, the presumptive 2012 GOP presidential candidate, said that if he were elected, he would not keep Bernanke on as chairman. 

"I'd be looking for somebody new," Romney said during a debate last year. "I think Ben Bernanke has overinflated the amount of currency he has created."

Many thought the dismal May jobs report, which showed the economy adding just 69,000 jobs, would help push the Fed to launch a new project to aid the economy. But at the June meeting of the policy-setting Federal Open Market Committee (FOMC), officials opted to take a bit of a half-step.

Instead of embarking on more easing or another new project, officials agreed to extend “Operation Twist” by another six months to support the economy. The initiative, which has the Fed selling short-term debt in exchange for long-term debt in a bid to spur more borrowing, was set to expire at the end of June. But at the central bank’s June policy-setting meeting, officials agreed to double its length, holding steady at the status quo.

To hear Bernanke describe it, the Fed was not yet sure at that point whether the slowdown was simply a seasonal factor, or the sign of more troubling fundamental issues.

“We had issues with weather and seasonal adjustment and other factors,” he said following the Fed’s last move. “There is some case to be made for making some additional judgments about where the economy is going.”

The June report, which now makes the average jobs gains over the last three months a paltry 75,000, may be enough to push the Fed to take the leap. At the very least, it should put to rest doubts that the labor market woes are a temporary seasonal issue.

“This is more than a fluke. This is a bunch of bad data in a row,” said Merk.

The FOMC meets again for a two-day meeting starting July 31, and markets will be on high alert for potential Fed moves. If not then, Bernanke’s annual address at August’s Fed summit at Jackson Hole, Wyo., will once again dominate headlines. Two years ago, Bernanke used the address to lay the seeds for the Fed’s second crack at quantitative easing, and one year ago the address was closely watched by markets for potential hints at “QE3.” With the economy still on shaky footing, it looks like 2012 could be the third year in a row that Bernanke’s words at the mountain retreat will command attention.

However, not all Fed-watchers are convinced that this latest report makes further central bank action a certainty. While Friday’s report missed expectations, it did not do so by leaps and bounds, as expectations were in the range of 100,000 to 125,000. Furthermore, while the headline number was a disappointment, there were some positive signs deep in the report, such as slight upticks in the length of the average workweek and average hourly earnings, as well as a boost in temporary hiring.

If the Fed is skeptical it can do much more to boost the economy – Bernanke has repeatedly told Congress that economic problems are primarily fiscal, not monetary, at this point – this report may not be abysmal enough to spur them to action, especially knowing that doing so will garner heightened criticism from Republicans already skeptical of the Fed’s recent moves.

“Jobs report probably not weak enough to trigger QE3 at Aug. 1 FOMC but recent weakness is clearly more than a weather payback,” said David Greenlaw, an economist with Morgan Stanley, on Twitter.

Further complicating matters for the Fed is that it just made a policy shift at the last meeting, which some think could nudge it towards holding steady for at least one meeting.

But with the election drawing near, a Fed that waits could find itself making contentious policy moves in the middle of a heated campaign — something the politically independent body would like to avoid if it can.

“Every day that passes, we get closer to the election, and that’s going to make it more difficult to do something out of the ordinary,” said Merk.