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Updated June 1, 2012, 3:59 p.m. ET
The Fed's Job Gets Even Tougher
By JUSTIN LAHART
It is déjà vu for the economy, with the third spring slowdown for job growth in a row. And it is déjà vu for the Federal Reserve, which again may feel compelled to boost efforts to shore up the economy—though with U.S. long-term rates at their lowest level in history, it isn't clear how much the Fed can do.
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There is nothing good to say about Friday's employment report. With just 69,000 jobs added last month, it was the worst showing for payroll gains since May last year. Worse, jobs figures for March and April were revised down.
The queasily familiar pattern is more than disconcerting. As in the previous two years, one can point to reasons for the slowdown (Europe, a payback for a mild winter, etc.), but it is odd that job growth in a giant economy should be so erratic.
.Perhaps there is something quirky going on with the data, but that is no solace: If economic reports keep showing the economy sputtering just as it looked like it was finally getting going, businesses will opt to err on the side of caution. Hardly the stuff of a robust recovery.
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The last two times the job market faltered, the Fed responded. In 2010, it launched a fresh round of quantitative easing, where it printed money to buy Treasury securities and mortgage debt. In 2011, it began "Operation Twist," the soon-to-end program that entails selling short-term Treasurys and buying long-term bonds with the proceeds.
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Up until Friday, most economists thought another Fed move was unlikely. That has changed. And if the Fed does make a move, it now looks more likely to start another session of quantitative easing, rather than to renew its twist.
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But with the yield on the 10-year Treasury at 1.47%, and with Freddie Mac's weekly rate reading on a 30-year fixed mortgage at 3.75%, it isn't clear that quantitative easing could induce rates to go much lower. It would be more of a reassuring show of support from the Fed's rate-setting committee—we're here for you, we feel your pain—and an attempt to juice stock prices.
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There are other things the Fed might do. Chicago Fed Governor Charles Evans has suggested the Fed could send a stronger signal by committing to keep short-term rates near zero until inflation reaches 3% or the unemployment rate drops below 7%. And if one turns to some of the ideas put forth in the early 2000s by a former Princeton University economics professor and Federal Reserve governor named Ben Bernanke, there are more radical things a central bank can do to get things going in a low-rate environment.
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Among the possibilities Mr. Bernanke suggested before he took on the Fed chairmanship: The Fed could explicitly set a high target for inflation—say 3% to 4%. It could put a ceiling on long-term Treasury yields. It could drive the dollar lower by buying foreign assets.
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And then there is the famous "helicopter drop." An idea borrowed from Milton Friedman, this would entail Washington passing a broad-based tax cut while the Fed bought any additional Treasurys the government had to issue to fund its budget.
Each idea has it problems. First, take targeting higher inflation. If investors believed the Fed would succeed, 10-year Treasury yields would likely surge, undermining a recovery. Capping yields in such a scenario might require an unfeasibly large expansion of the Fed's balance sheet and scare off foreign creditors like China. Buying foreign assets would be politically hard to justify. Meanwhile, the potential to get anything like the Milton Friedman idea through a gridlocked congress ahead of a presidential election looks slim.
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The Fed won't stand by and watch if the economy continues to deteriorate. But its room to maneuver looks increasingly narrow.
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.Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved
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