From Mike O’Rourke’s latest note, a good observation regarding the weak labour market and the quandary that poses for Ben BernankeThe cornerstone of the FOMC current quantitative easing policy is that the low inflation environment in the United States provides latitude for aggressive action to tackle the Unemployment Rate. Just three days ago, the Fed Chairman noted that “Following the loss of about 8-1/2 million jobs in 2008 and 2009, private-sector employment showed gains in 2010. However, these gains were barely sufficient to accommodate the inflow of recent graduates and other new entrants to the labour force and, therefore, not enough to significantly reduce the overall unemployment rate.” In the FOMC’s economic forecast released in November, at the outset of QE2, its forecast for 2011 Unemployment Rate was increased from 8.5% to 9%. We have received our first employment report of 2011 and the FOMC’s target has been met. As discouraged workers return to the labour force, additional improvements will be slow and an uptick in the Unemployment Rate is likely. Regardless, the FOMC was not expecting such a print and it makes expanding QE beyond the current $600 Billion very challenging.
The Unemployment Rate is the key metric for Main Street as well as politicians. Within the United States, the economic and anecdotal data has exhibited notable improvement, thus providing some type of common sense affirmation of the Unemployment Rate. While we have examined the different nuances explaining the improvement in the Unemployment Rate, it is difficult to convey to Main Street. In short, the Fed Chairman cannot continue to justify the QE2 program to the public without telling them not to believe the Unemployment Rate. Although there is a significant amount of time between now and the March 15th FOMC meeting, we expect that the Committee will have no choice but to slow the amount of monthly purchases by extending the purchase of the same $600 Billion in Treasuries to September. At that point, the program will be more than half complete. The amount of new purchases should drop from $75 Billion per month to $40 Billion per month.