Is Another Round of Quantitative Easing Coming?

Today was a special Jobs Day Tuesday as the Bureau of Labor Statistics released the September jobs report, which had been delayed due to the government shutdown. It wasn’t very good. Total non-farm payrolls increased by 148,000, which was less than the expected 180,000, while the unemployment rate dropped from 7.3% to 7.2%. The labor force participation rate remained unchanged at 63.2%. The July (-15,000) an August (+24,000) revisions combined for an increase of 9,000 jobs.This report was disappointing, but what’s even scarier is the trend lines.

Here’s the three-month moving average going back to the end of 2011:

3 month moving averageThere’s a pretty good chance that something is wrong with the way the BLS seasonally adjusts the numbers. Every winter has been much better than the following summer, but the trend is still not good. We’re into Obama’s second term and the economy is still barely growing. The reasons for this aren’t clear, but the government likely has a lot to do with it. Sequestration is terrible policy that is taking a chunk out of the economy at the wrong time. Austerity is the last thing we need right now. The expiration of the payroll tax cut at the start of this year is likely having some effect as well. And, of course, shutting down the government and risking a default is about as boneheaded as it gets. Instead of constructing policies looking to get the economy back going, the federal government (read: Republicans) have stood in its way.

The Federal Reserve has been concerned about fiscal policy and chairman Ben Bernanke has repeatedly emphasized that Congress needs to do more. Except that’s never going to happen. The question then is will the Fed do more? The economy is slowing down, not recovering. The FOMC had hinted at tapering in September, but pushed it off due to weak data and the impending fiscal fights. The market had assumed that the Fed was going to reduce its bond purchases regardless of the underlying data. By delaying the taper, the central bank attempted to regain its credibility and prove to investors that it’s data-dependent. Now, this is another test of that credibility.

This was a bad report and the economy is trending downwards. More fiscal fights loom and sequestration will be worse in 2014 than it was this year. Inflation is still running well below the Fed’s 2% target. If the Fed is really data-dependent, it will seriously think about making its policy even more accommodative either through QE4 or another mechanism.. The economy is no longer improving at a moderate pace. It’s slowing and there’s no chance that fiscal policy will help. It’s time for the Fed to pick up the slack.

A Few Republicans Are Crazy But Consistent

When I read National Review reporter Jonathan Strong’s piece this morning that some House Republicans weren’t happy with their first offer to President Obama in return for raising the debt ceiling, I was shocked. The offer is basically everything House Republicans could ever want and they weren’t happy with it?! But as I’ve thought it over, it actually makes a bit of sense. From Strong’s article:

“It definitely has a lot of goodies in it – things that arguably would grow the economy and arguably would generate revenue. But still you have to address the spending problem,” said Representative Mo Brooks of Alabama.

“The reason that we have to raise the debt ceiling is because we have deficits. The reason that we have deficits is because we spend a whole lot more money than we bring in in revenue. And this debt-ceiling package does not fix the underlying cause of the problem, which are the deficits,” he added.

Other House Republicans expressed similar sentiments. This is actually consistent with what House Republicans have been screaming about for years: more spending cuts in return for raising the debt ceiling. Now, our deficits are falling fast and the long-term debt has decreased significantly so it’s absurd to be cutting spending more. But this makes more logical sense then the christmas tree list of demands in the Republicans first offer.

The ironic thing is (and always has been) that by having the U.S. risk default, it actually drives up our borrowing cost and increases our debt. If we were to breach the debt ceiling, it would likely increase our long-term interest payments by nearly a trillion dollars. So it makes absolutely no sense to use the debt ceiling as leverage to extract spending cuts or anything else from the president. It’s a crazy, irresponsible tactic. The debt ceiling should be forever abolished.

But at least some House Republicans haven’t lost sight of the fact that their original reason for using the debt ceiling as an extortion device was because of the long-term debt. Business Insider’s Josh Barro wrote today that all of this shows that “the pretense that debt limit fights are about the public debt is over.” For most Republicans, that is certainly the case. But Strong’s article demonstrates that there are some who are still sticking to that principle. They are reckless, rash and stupid for holding the debt ceiling hostage, but unlike the rest of their colleagues, they are also consistent.