Spare a bit of sympathy for the Federal Reserve Board’s monetary policy gurus. They have said they will begin to “taper” their purchases of bonds and mortgages when the unemployment rate falls to 6.5 percent. So July’s dip from 7.5 to 7.4 percent, the lowest rate since December 2008, should edge the Fed closer to reducing its purchase program. Alas, life is not so simple for the Fed. The unemployment rate dipped, but only 162,000 jobs were created in July, down from 188,000 in June, and below the approximate 200,000 average in the first half of the year. Worse: previously reported job creation figures for May and June were revised down by 26,000. What is a poor monetary policymaker to do?
In one sense these figures burnish the forecasting credentials of Fed chairman Ben Bernanke & Co. Earlier this week, before the latest jobs figures were announced, they concluded their latest meeting by announcing that the economy is no longer expanding at the “moderate” pace they previously thought. Instead, the pace of the recovery is merely “modest.” If you think that’s a distinction without a difference, think again. The “moderate” pace was fast enough to trigger a market sell-off in the belief that the Fed’s program of buying bonds and mortgages to keep interest rates down would be cut sharply and soon. The “modest” pace is slow enough to give bond prices a bit of support, and make market-watchers believe that the day on which the QE3 will head for the dry dock at top speed might not be around the corner after all, despite the fact that the Fed did not retreat from hints it might wind down its purchases next month. After all, Bernanke would like to get the process of tapering started before he turns his chair over to the man or woman President Obama chooses to head the Fed for the next four years.
