Will the poor US jobs figures finally send Ben Bernanke’s helicopter aloft? With the end of the four-year run in job creation, it looks like the financial sector’s credit problems and the housing mess is finally damaging the broader economy. The Fed has been wily in its response to these problems so far—lowering its punitive discount rate to provide liquidity while making financiers pay for their recklessness,?and?not?stoking inflation. But its job just got a lot harder.
The Fed has rightly snubbed financiers looking for a bailout. But the jobs figures provide evidence of distress in the real economy that’s impossible to ignore. Bernanke is famous for his focus on data, rather than market sentiment. Now he has a data point that supports easing. Futures markets and stock investors are convinced that’s what he’ll do. Indeed, if he stands pat, it could precipitate a rout—which, on top of the ongoing credit woes?and housing bust,?is the last thing Bernanke needs.
Apart from the pressure of market expectations, is a rate cut wise? Well, the jobs figures for August, calculated during the worst of last month’s credit market meltdown, look dire. And it looks from the precipitous decline in manufacturing jobs that the pain is spreading into the economy’s muscle. But other recent indicators of manufacturing sector health have been positive. And jobs figures are notoriously subject to revision. In fact, the job figures were a complete surprise. Economists expected non-farm payrolls to increase by 110,000, not fall.
But assume the numbers are generally right—and given the downward revisions to June and July, the trend certainly appears negative. The argument for easing is still not clear-cut. The dollar fell sharply against the euro and yen after the jobs report came out, on expectations of a rate cut. And a decline in the dollar is itself inflationary.
To make things worse, the next round of inflation figures are due out on the same day the Fed rate-setting committee meets. Should inflation come in above expectations, Bernanke will face an unpleasant choice: keep up the fight against inflation and protect the value of the dollar while pushing markets, and possibly the economy, off a cliff. Or ease and try to get inflation under control later. The latter option looks most likely. But such a move should be accompanied by a truly hawkish statement to staunch expectations of further cuts.