Payroll report suggests FED to begin easing monetary policy

This morning’s payroll report gives the Fed the cover it needs to begin easing monetary policy in a serious way, using the biggest guns in its arsenal. Any lingering fears on inflation are now firmly in the rearview mirror and the Fed’s objective to maintain economic growth is paramount. The bad news is the Fed now appears somewhat behind the curve as often happens in times of economic transition. There is now a real danger of recession, and some analysts will worry that one is now unavoidable, or even that we are in one already. We do not yet go that far. A recession is still avoidable in my opinion, but the Fed will need to act promptly and with authority to right this sinking ship.

Bulls may latch on to the fact that the unemployment rate held steady at 4.6 percent, but the household survey showed an even bigger drop in employment in August, down 316,000 jobs, so that shred of comfort is a statistical myth.

In the near-term expect economic and financial volatility is going to get ugly. A major slowdown in growth is not yet priced into equities; expect major cuts in analyst earnings estimates for the third and fourth quarters of this year. The Fed now has the evidence it needs to cut the Fed funds target rate at least 25 basis points in September. The Fed funds futures market is now placing higher odds on a 50 basis point cut. While the payroll data is just one data point for the Fed to consider, it is one that carries the most weight in the Fed’s eyes.

Scott Anderson, Ph.D., Senior Economist, Wells Fargo Bank