December 4, 2021

Job and Price Data May Signal the End for Federal Stimulus

Government reports on Thursday suggested an acceleration in job growth in early August and hinted at pockets of pricing power in the sluggish economy. The data could ease concerns among some Federal Reserve officials that inflation has been too low and the job market too weak, drawing the central bank closer to tapering off its economic stimulus program.

While statistics on manufacturing were less encouraging, economists were little fazed and said they merely suggested that the improvement in factory activity was slower than anticipated.

“It looks like the weakness in employment last month was a fluke, and the breadth of gains” in the Consumer Price Index suggest that “there will be less pushback against tapering because of low inflation,” said Ryan Sweet, a senior economist at Moody’s Analytics. “A September taper is still on the table.”

The Fed has indicated that it wants to wind down its monthly purchase of $85 billion in Treasury and mortgage-backed securities, perhaps by September.

First-time applications for state unemployment benefits dropped 15,000 to a seasonally adjusted 320,000, the lowest level since October 2007, the Labor Department said. Economists had expected initial claims to come in at 335,000 last week.

The four-week moving average of new jobless claims, which irons out week-to-week volatility, fell to its lowest level since November 2007.

Carl Riccadonna, a senior economist at Deutsche Bank Securities, said the drop in new jobless claims to prerecession levels was consistent with a pickup in the pace of hiring, if not in August, then at some time in the next couple of months.

“The critical component is going to be the August jobs report,” he said. “If that comes in at least where it was in July, then this is going to keep the Fed on track to initiate tapering at the September meeting” of the Fed’s policy makers.

Employers added 162,000 jobs to their payrolls last month, with the unemployment rate dropping to 7.4 percent.

In another report, the Labor Department said its Consumer Price Index rose 0.2 percent last month, in line with economists’ expectations, as the cost of goods and services including tobacco, apparel and food increased.

The C.P.I. gained 0.5 percent in June. In the 12 months through July, the C.P.I. advanced 2 percent, the largest annualized increase since February, after rising 1.8 percent in June.

The rise in inflation to the Fed’s 2 percent target suggested that the downward drift in prices seen early in the year was over, which could comfort some central bank officials who have warned about the potential dangers of inflation running too low.

Even stripping out energy and food, the core rate of consumer prices still rose 0.2 percent for a third consecutive month. That took the increase over the last 12 months to 1.7 percent after core C.P.I. gained 1.6 percent in June.

The uptick in prices fits with the view of Ben S. Bernanke, the Fed chairman, who has said he considers the low inflation temporary.

James Bullard, the president of the Federal Reserve Bank of St. Louis, who has voiced concern that inflation was still too low, said he was encouraged by July’s rise in consumer prices.

“To the extent that you have got higher inflation numbers in this report, that would be bolstering the notion that inflation would be naturally moving back toward target,” Mr. Bullard told reporters in Louisville, Ky.

Last month, there were increases in the prices of gasoline, transportation and shelter. Medical care services recorded a second month of gains in July. Medical care, which makes up about 10 percent of the core C.P.I., was subdued in April and May.

The news on the factory sector was a bit downbeat, with the Fed reporting that manufacturing output slipped 0.1 percent last month, held down by a 1.7 percent fall in the production of motor vehicles and machinery. That, together with a drop in utilities production, left industrial output unchanged in July.

Separately, the Federal Reserve Bank of New York said its Empire State general business conditions index fell to 8.24 in August from 9.46 in July. A reading above zero indicates expansion. But details of the report were fairly encouraging, with strong gains in the labor market.

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Fed Meeting Shows Dissent on Measures to Lift Job Growth

WASHINGTON – There are widening divisions among Federal Reserve officials about the value of its efforts to reduce unemployment, but supporters of those efforts remain firmly in control, according to an official account of the Fed’s most recent meeting in January.

An increasingly vocal minority of Fed officials are concerned that buying about $85 billion of Treasury securities and mortgage-backed securities each month is doing more harm than good. They argue the purchases may need to end even before unemployment drops, because the Fed’s efforts are encouraging excessive risk-taking and may be difficult to reverse.

But the Fed’s policy-making committee reiterated its determination in January to hold course until there is “substantial improvement” in the outlook for job growth, and several officials cautioned at the January meeting that the greater risk to the economy was in stopping too soon, according to the account, which was published after a standard three-week delay.

“A few participants noted examples of past instances in which policymakers had prematurely removed accommodation, with adverse effects on economic growth, employment, and price stability,” it said. “They also stressed the importance of communicating the Committee’s commitment to maintaining a highly accommodative stance of policy as long as warranted by economic conditions.”

Proponents of strong action to reduce unemployment raised for the first time the possibility that the Fed should maintain a portion of its asset holdings even as the economy recovers because doing so could magnify the benefits. Its holdings now total almost $3 trillion.

The meeting account shows Fed officials generally expected a slow improvement in economic conditions, and were not overly concerned that the economy did not expand, or expanded only modestly, in the final months of 2012. While they anticipated additional cuts in federal spending, the risk that the federal government would drag the economy back into recession also faded.

The high rate of unemployment remained the primary concern for most of the 19 Fed officials who participate in the regular meetings of the Federal Open Market Committee.

The Fed’s vice chairwoman, Janet Yellen, reiterated her strong support for asset purchases in a speech this month. Noting that inflation remained low and steady, while unemployment remained stubbornly high, Ms. Yellen said it was “entirely appropriate for progress in attaining maximum employment to take center stage in determining the Committee’s policy stance.”

Some Fed officials have expressed growing unease that, even if inflation remains under control, asset purchases may disrupt financial markets. One concern is that low interest rates will encourage excessive risk-taking, inflating new asset bubbles that will inevitably pop. The Fed’s purchases also may disrupt the normal operations of financial markets by constraining the supply of safe assets.

Jeremy Stein, a Fed governor, said this month that he saw “a fairly significant pattern of reaching-for-yield behavior emerging in corporate credit,” referring to a rise in the sale of new junk bonds, or high-risk corporate debt.

Mr. Stein said he did not see any reason for an immediate change in Fed policy, but Esther George, president of the Federal Reserve Bank of Kansas City, cited similar concerns in opposing the current policy at the January meeting.

The Fed could be fortified in its current policies if Congress continues to cut spending. Another round of cuts is scheduled to take effect March 1. The Congressional Budget Office estimated that the cuts would reduce growth by 0.6 percentage points this year, and employment by about 750,000 jobs.

“I expect that discretionary fiscal policy will continue to be a headwind for the recovery for some time, instead of the tailwind it has been in the past,” Ms. Yellen said in her recent speech.

Fed officials, however, have cautioned that they are not likely to respond to such cuts by increasing their efforts, because they are increasingly concerned that the potential costs of additional action would outweigh the benefits.

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Some Fed Officials Worried About Job Market

WASHINGTON — Federal Reserve officials, at their last meeting, expressed concerns that the weakening job market might hold back the economic recovery.

Fed officials said they expected the economy would pick up in the second half of the year after slowing this spring. But the outlook for both employment and inflation were unusually uncertain, given the sluggish growth and a jump in energy prices this year.

The minutes cover the Fed’s June 21-22 meeting. At that meeting, the central bank lowered its economic forecast but kept a pledge to leave interest rates at exceptionally low levels for an extended period.

“The recent deterioration in labor market conditions was a particular concern … because the prospects for job growth were seen as an important source of uncertainty in the economic outlook,” the minutes read.

Fed policymakers met shortly after the government released its May employment report. Last week, the government offered an even gloomier jobs report for June.

The economy added just 18,000 jobs last month, the fewest in nine months. And the May data were revised downward to show just 25,000 jobs added — fewer than half of what was initially reported. The unemployment rate rose to 9.2 percent, the highest rate this year.

Companies have pulled back sharply on hiring after adding an average of 215,000 jobs per month from February through April. The economy typically needs to add 125,000 jobs per month just to keep up with population growth. And at least twice that many jobs are needed to bring down the unemployment rate.

After last month’s meeting, the Fed said in its policy statement that the economy had slowed, in part, because of higher energy prices and supply-chain disruptions caused by the Japan earthquake and tsunami.

But at a news conference after the meeting, Fed Chairman Ben S. Bernanke acknowledged that some of the economy’s problems are more long-lasting and go beyond temporary shocks. Mr. Bernanke is scheduled to give his semiannual economic report to Congress this week.

The Fed cut its forecast for economic growth for this year to a range of 2.7 percent to 2.9 percent. It had previously expected the economy to grow 3.1 percent to 3.3 percent this year. The Fed also said unemployment would stay higher than it had expected earlier.

The economy grew at a weak 2 percent pace in the first half of this year, analysts say. It was expected to improve to a 3.2 percent pace in final six months of the year, according to an Associated Press survey of 38 economists. But the latest employment report has cast doubt on those forecasts.

The Fed stuck to its plan to bring to an end this month a program to help the economy by buying $600 billion in government bonds. The Fed also intends to keep short-term interest rates near zero “for an extended period,” a phrase it has been using the past two years. Though the central bank noted that inflation has risen, it expects that to be temporary as well.

Many economists say they don’t expect the Fed will raise interest rates until next summer at the earliest. And some think the Fed will wait until 2013, based on the weak economy.

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