Despite Jobs Report, Street Unsure of Fed’s Next Move


Far from making the outlook clear, last week’s somewhat better-than-expected jobs report appears to have muddied the outlook on Wall Street for what Ben Bernanke and the Federal Reserve will do next.

Traders work in the ten-year U.S. Treasury Note options pit at the Chicago Board of Trade in Chicago, Illinois, U.S.
Daniel Acker | Bloomberg | Getty Images

None of the data meaningfully changed the growth forecast. The government reported 163,000 jobs created in July, about 60,000 more than forecast, but the unemployment(explain this)rate ticked up to 8.3 percent from 8.2 percent.

Add up all the other data from the week, and Macroeconomic Advisors concluded that second-quarter growth will now be revised upward by a meager tenth of a percentage point to 1.6 percent. It means the economy still finished the second half of the year stuck in the mud. There also was little change in the outlook for the third quarter, with many forecasts predicting only a slight strengthening to around 2 percent.

What is striking is the divergence now in opinions when it comes to the Federal Reserve (explain this). Last week the Fed inserted language in its policy statement that it would “closely monitor” economic developments, a clue to some that it could move between meetings or would almost certainly act between meetings.

JPMorgan is sticking to that call in its post-jobs report commentary, writing, "Absent an upside surprise on August jobs, the Fed is likely to begin another round of asset purchases in September."

It’s a plausible argument supported by the data of a rising unemployment rate and lackluster growth. It was definitely the consensus in the CNBC Fed Survey released on Tuesday, which found that 78 percent expect additional quantitative easing (explain this) in the next 12 months, and 56 percent of those see it coming in September.

But Goldman Sachs offered a more nuanced and patient view of coming Fed stimulus. In the Goldman view, the Fed will act in September, but only by extending its forecast for how long it expects to keep rates exceptionally low from "late 2014" to "mid-2015."

Goldman sees to additional asset purchases in “late 2012/early 2013.” That’s when the Fed’s current program of selling short-term bonds that it holds and buying long-term paper, known as Operation Twist, expires. The Goldman idea is interesting because it corresponds better with Fed thinking in at least one respect: The Fed believes its move to extend Twist in June was more consequential a policy act than the market did. Investors appeared to take the announcement entirely in stride and looked quickly to the next policy move.

The bigger question is whether there is indeed a grand plan. Vince Reinhart, a former top Fed staff official and now the central bank analyst at Morgan Stanley, sees less design and more dissension at work.

"This is a policy committee doubtful of the efficacy of its instruments or hamstrung in its ability to use them," he wrote in his commentary. “The latter is a consequence of division within the Committee and a particularly contentious election looming on the horizon.”

But the former — doubts about the efficacy of policy — is probably more important. As John Ryding from RDQ Economics pointed out on “Squawk Box” this morning, very few of the same economists who offer their outlook on policy are at the same time making a strong or even cogent case that new policy do much good. Instead, markets are gearing up for an automatic reflex from the Fed — because growth is low and unemployment rising, the Fed will act.

Mixed Reaction to Jobs Data

There are few who say Fed action will lower rates and prompt a meaningful change to the outlook for jobs or growth. Until that argument is believed by the Street, and indeed the Fed, the outlook for policy will continue to be murky. Many are now looking to Fed Chairman Bernanke’s speech at the annual gathering of central bankers in Jackson Hole, Wyo., later this month for a sense of what policies the Fed is considering and how much good they will do.