MacroScope

Is recent job growth enough to ice the Fed’s QE3 plans?

February 2, 2013

The U.S. Federal Reserve has promised to keep up the bond-buying program known as QE3 until the labor market improves substantially.

While the Fed has so far declined to specify exact milestones for labor market improvement, that hasn’t stopped some top Fed officials opining. “One good indicator of labor market improvement would be if we saw payroll employment increase by 200,000 each month for a number of months,” Chicago Fed President Charles Evans said in Hong Kong last month.

Whoa. Could it be we are nearly there?

Revisions of U.S. government data out Friday morning show that jobs growth – which when Evans made that statement in Hong Kong was averaging about 150,000 a month – has averaged exactly 200,000 for the past three months.

Certainly, three months is “a number.”  Evans’ success in convincing his colleagues to promise low rates until unemployment drops to a specific threshold suggests his views may be somewhat of a bellwether. Has the Evans QE3 threshold been met?

Not so fast. There’s more to Evans’ thinking on QE3 than just jobs growth. Last November, he spelled it out in more detail:

“The natural question at this point is to ask: What constitutes substantial improvement in labor markets? Personally, I think we would need to see several things. The first would be increases in payrolls of at least 200,000 per month for a period of around six months.”

Okay, stop right there. Evans isn’t talking about average jobs growth – he wants each and every month to add more than 200,000 jobs, for six months.

He continues: “We also would need to see a faster pace of GDP growth than we have now — something noticeably above the economy’s potential rate of growth. Such concurrent gains should be enough to produce sustainable downward momentum in the unemployment rate and to make us more confident that the improvements are sustainable.”

Here again, the economy is falling short. GDP unexpectedly shrank last quarter. And the unemployment rate actually ticked up last month, to 7.9 percent.

Boston Fed President Eric Rosengren has also floated a QE3 threshold, saying bond purchases should continue until unemployment falls to 7.25 percent.

Still, the payrolls data is worth watching. A few more months of gains like the last three could well mean the unemployment rate comes down a few ticks, putting the Fed that much closer to the end of QE3.

But at this point: Definitely not there yet.

“Throughout this whole process the Fed has erred on the side of more easing, rather than less, and I don’t see these revisions changing that,” said Eaton Vance portfolio manager Eric Stein. “Maybe if you saw a couple of months of 250,000 (jobs gains) and unemployment coming down, you would see things change.”

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