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BEN BERNANKE RECENTLY HAS BEEN HAMMERED with questions, not all of them friendly from Congress, so the Federal Reserve chairman decided to provide his own list of Frequently Asked Questions, or FAQs, Internet-style to a group of economists in Washington Monday.
But the answer to the question foremost in the market's mind came not from the FAQs but the Q&A: that the central bank's target rate for federal funds will remain at the ultra-low 0-0.25% range for "an extended period."
That key phrase, a reiteration from recent statements by the recent policy statements of the policy-setting Federal Open Market Committee, was omitted from the prepared text of Bernanke's speech. The Fed chief, however, invoked the "extended period" verbiage right at the outset of the question-and-answer period.
Even without those key words, his intent was clear from the text—and was contrary to the inferences by the financial markets following Friday's report of a much smaller-than-expected decline of 11,000 in non-farm payrolls during March.
Monday evening, New York Fed president William Dudley reiterated that the likelihood of "slightly weaker" growth next year points to low interest rates for an "extended period."
Following Friday's jobs report, the futures market boosted odds of an increase in the fed-funds target to 0.5% by mid-2010 to better than two-to-one. After Monday's comments from Bernanke, the odds makers in the futures pits had the betting line down to even-money.
Part of the lowering of the odds reflected the Fed chairman's view on the outlook for monetary policy. But there also is growing skepticism about the government's jobs numbers, which are far less negative than those from the private sector.
Of the former aspect, Bernanke invoked one of the favorite phrases of his predecessor, Alan Greenspan, in citing the "headwinds" facing the economy from tight credit conditions. That's how Greenspan described the effects from banks' reluctance to lend in the early 1990s following that period's real-estate collapse, which justified the Fed's then-low 3% fed-funds rate.
Both Bernanke and Dudley also noted that inventory rebuilding currently is spurring growth. The Fed chairman averred that final demand has to revive to maintain that growth. Meanwhile, the head of the New York Reserve Bank noted that fiscal stimulus, "which is very powerful now, will abate as we go through 2010."
Bernanke, moreover, asserted the Fed won't let inflation rise, which he said "appears likely to remain subdued for some time" owing to the considerable slack in the economy.
The main source of slack is unemployment, which the Bureau of Labor Statistics reported ticked down to 10% last month from 10.2%. But a number of observers are pointing to various incongruities in the employment report.
"If Unemployment Dropped, Why Didn't the Conference Board Notice," I wondered last Friday morning. Its consumer confidence survey found no decline in respondents calling "jobs hard to get" or any increase seeing "jobs plentiful." And ADP found private-sector payrolls fell by 169,000 in November while the BLS counted only 18,000 private job losses.
The discrepancy among service-sector jobs was even more egregious, according to David Rosenberg, chief strategist of Gluskin-Sheff. The BLS estimated service-sector employment rose by 58,000. But ADP found an 81,000 decline, which as not much different from the 79,000 drop in the firm's October survey. The probability of such a discrepancy between the BLS and ADP numbers is 1 in 35, he adds.
Moreover, Rosenberg points out the 58,000 increase in service-sector workers reported by Washington "was completely at odds" with the ISM non-manufacturing employment index of 41.6. (Remember, anything below 50 corresponds to contraction.) That reading is consistent with a 192,000 drop in service-sector employment, he says.
By the reckoning of Ian Shepherdson, chief U.S. economist of High Frequency Economics, the ISM nonmanufacturing index tracks overall payroll declines of 350,000 per month. Moreover, payrolls are stronger than implied by the decline in initial claims for unemployment insurance to a degree that, by statistical analysis, should happen once every 57 years, he adds.
If these savvy private economists see so many of the BLS' numbers don't add up, perhaps top-shelf macroeconomists such as Messrs. Bernanke and Dudley also are taking Friday's employment report with a few grains of salt. Only the bulls seemed to take them at face value.
At a minimum, some skepticism seems in order regarding the pace of economic recovery. In which case, the likelihood of any near-term Fed rate hikes diminishes substantially.
Comments: randall.forsyth@barrons.com
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