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The latest jobs data out of the U.S. released Friday was considerably weaker than expected. Several analysts said in television appearances and notes to clients that this number is a big deal for prospects for more monetary easing by the Federal Reserve.Many now think the weakness in employment statistics has considerably increased the likelihood that the Fed will launch QE3 at the next FOMC meeting on Wednesday and Thursday, September 12 and 13.
JPMorgan economists Bruce Kasman, David Hensley, and Joseph Lupton think it’s a done deal.
And they think that a radical shift in Fed policy may transpire soon as well if the data remains weak.
In a note to clients, the economists write:
Fed to deliver QE3 and ponder Evans plan
The debate about Fed action next week has been ended as a result of the weak August payroll report. Look for action on two fronts. The Committee will initiate a new round of asset purchases, with agency-MBS constituting some, if not all, of these purchases. The Committee should also push back its low-rate guidance from late 2014 to mid-2015, with this guidance possibly augmented to note that exceptionally low interest rates will be maintained even as the recovery progresses.
Such a statement would be a partial nod to the Evans rule. Although this is not our baseline view, movement toward an Evans rule—whereby policy is kept extremely easy until the unemployment falls below 7% as long as inflation remains below 3%—is likely to become the centrepiece of the next round of policy stimulus if the labour market remains soft as we turn into 2013.
The Evans rule refers to a suggestion by Chicago Fed President Charles Evans who recently called for open-ended bond-buying until certain economic measures — like unemployment — improve.
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