Federal Reserve Chairman Ben Bernanke’s caution about the outlook for the labor market was vindicated by Friday’s report that U.S. payroll growth in March was the slowest in nine months.
The 88,000-job increase, which was smaller than the most pessimistic forecast in a Bloomberg survey, gives Bernanke and his policy-making colleagues more reason to press on with $85 billion in monthly bond purchases aimed at reducing unemployment, said Julia Coronado, a former Fed economist.
“This validates their caution and keeps policy very much steady as she goes,” said Coronado, chief economist for North America at BNP Paribas in New York. “I can’t imagine they’d seriously consider tapering QE until much later in the year at the earliest, and that’s if all goes well,” she said, referring to bond purchases known as quantitative easing.
The Federal Open Market Committee in a March 20 statement said it will continue its asset purchases until the labor market improves “substantially.” Bernanke at a press conference that day called employment gains “modest” and said the Fed wants to see “sustained improvement across a range of indicators,” including wages, jobless claims and the hiring rate.
The labor-force participation rate fell to 63.3 percent last month, the lowest since May 1979, the Labor Department said Friday. The decline in the labor force pushed the jobless rate down to a four-year low of 7.6 percent from 7.7 percent. Average hourly earnings stagnated while the average work week for all employees increased.
“It will be several months before we see any discussion about an imminent cutback in the pace of purchases,” said Dana Saporta, U.S. economist at Credit Suisse Group AG in New York. The Fed last month affirmed its bond-buying plan “even in the face of better data,” she said. “They wanted to see if the job gains persisted — in retrospect, a wise decision.”
In the six months before March, job gains averaged 197,000. The February unemployment rate of 7.7 percent was down from 8.3 percent a year earlier. Last month, initial weekly jobless claims fell as low as 334,000, the lowest since January 2008.
Federal Reserve Bank of New York President William C. Dudley voiced doubt about the durability of employment gains in a March 25 speech.
“The recent improvement in payroll employment growth, which gets much of the attention, is outsized relative to the growth rate of economic activity that supports it,” Dudley said to the Economic Club of New York. “We have seen this movie before. When this happened in 2011 and 2012, employment growth subsequently slowed.”
Fed officials, including Dudley, have publicly debated the conditions that may cause them to reduce the pace of purchases.
Vice Chairman Janet Yellen on Thursday became the latest policy maker to endorse a proposal by St. Louis Fed President James Bullard to reduce bond buying as the economy improves or expand it in response to signs of weakness. Fed officials have also discussed whether risks such as the emergence of asset price bubbles would warrant paring back their purchases.
“I don’t think the costs of QE are significant enough to induce them to slow down in the near term,” said Roberto Perli, senior managing director at the International Strategy and Investment Group in Washington, and a former Fed economist.
The Fed probably won’t adjust its pace of purchases at their next two or three meetings, Perli said. “This is a reminder there might be some bumps along the road here, and so the cautious approach is probably the correct one.”