There is a technical term for the Federal Reserve’s current predicament. It’s called “screwed.”
You might remember that the Fed last month reduced the number of bonds and mortgage securities it is purchasing under its disastrous Quantitative Easing program because, it said, the economy was showing improvement.
I’m not sure whether the Fed actually believed that or if the few bits of better economic data just gave outgoing Chairman Ben Bernanke the excuse he needed to backpedal on QE.
Well, on Friday the whole thing blew up in the Fed’s face.
And now it’s incoming Fed boss Janet Yellen’s problem.
The Labor Department yesterday announced that only 74,000 jobs were created in December — and almost all of them were in retail, which isn’t a surprise since stores wanted to have plenty of workers on hand to greet the Christmas shoppers who weren’t going to show up.
That’s the smallest monthly increase in jobs in three years.
And it’s way below the 200,000-plus that everyone (including me) thought would be announced.
Expectations had even grown since the ADP National Employment Report on Thursday said 238,000 jobs were created by companies in December.
There was also “good” news — at least it is good if you don’t fret the details.
The nation’s unemployment rate in December plunged to 6.7 percent, from 7 percent.
But that steep decline came wrapped in a toxic coating. Folks are giving up looking for work. If you’re not looking for work, you’re not unemployed, as far as Labor is concerned.
The percentage of people 16 and over who are seeking work or have a job is called the labor participation rate. In December it hit a 35-year low, at 62.8 percent.
The Fed meets with Yellen at the helm for the first time on Jan. 28 and 29.
Up until Friday’s employment report, the betting on Wall Street was that purchases under QE would be cut more than what’s already been indicated.
Scratch that idea.
In fact, if I’m right and the January employment report that comes out in February is also nasty, then the Fed’s dialogue will change dramatically.
More bond purchases under QE, not fewer, will then be on the table.
Interest rates declined on Friday’s disappointing jobs report — but so, too, did stock prices.
Borrowing costs were obviously reacting to the perceived slowdown in the economy.
Stocks dropped because investors are confused.
Wall Street should be happy that QE tapering will likely be put off.
But that pesky drop in the unemployment rate is a problem.
Bernanke has said QE would start to be dismantled when the unemployment rate declined — and Yellen is expected to keep that pledge.
But pegging QE to the jobless rate never really made much sense since — as I just explained, the drop to 6.7 percent isn’t really good news.
But Bernanke said what he said, and the stock market now has to puzzle over it.
And so does Yellen.
She thought Bernanke had set everything up for her.
But that set-up came tumbling down on Friday.