Last Friday’s disappointing employment report raises the odds of more quantitative easing by the Fed. Payroll employment increased by only 96,000, and the increases reported in prior months were revised lower. The unemployment rate fell, but only due to a decline in the labor force. The labor force participation rate has fallen to 63.5%, the lowest level since September 1981. With GDP growth of just +1.7%, the U.S. economy is not growing at a pace sufficient to create needed job gains. The chart below shows just how weak job creation has been compared to previous recoveries. (Bureau of Labor Statistics).
This employment report did not offer the Federal Reserve evidence of a “substantial and sustainable strengthening in the pace of the economic recovery” that they are seeking. As a result, the odds that the Federal Open Market Committee (FOMC) will announce further easing at their meeting on September 12/13 have increased. Consensus seems to expect additional easing, and a lack of announcement to that effect could disappoint the markets. There has been talk of an open-ended buying program of U.S. Treasuries and/or mortgage-backed securities. The FOMC could also extend their rate guidance, perhaps pledging low rates into 2015.
Inflation remains within the Fed’s target level, so they still have room to ease; however, the effectiveness of further monetary policy easing is diminishing. While the Fed feels obligated to act to fulfill their mandate of economic growth, the bigger problems facing the U.S. economy – the fiscal cliff, the Eurozone crisis and slower growth in China – are outside the Fed’s control. More certainty surrounding fiscal policy would allow businesses pick up the pace of hiring and investment, boosting economic growth
 Ben Bernanke, Federal Reserve Chairman.