Wall Street has been waiting, waiting, waiting for a new Fed initiative to jack up a sagging economy. Now financial markets will probably get their wish.
The modest growth in jobs during August, when the economy added 96,000 workers and the unemployment rate dipped to 8.1%, means the Federal Reserve is likely to launch a new round of quantitative easing - a term for pumping money into the economy by buying government bonds - possibly as soon as next week's meeting of the central bank's policymaking committee.
Economists have been predicting more Fed action in September all summer, and a series of leaks before last month's meeting even suggested it might happen sooner.
The only thing that had been expected to stop it was if the economy suddenly strengthened enough to persuade Fed chairman Ben Bernanke, who has been seen as eager to do more to boost hiring, that he should stay his hand.
"Employment would need to grow a lot more than 200,000 a month to bring unemployment down to a rate that's agreeable to the Fed,'' Paul Ashworth, an economist at Capital Economics, said before Friday's jobs report came out.
Why is QE a big deal?
First, because the first two rounds of quantitative easing have created or saved jobs.
Bernanke cited studies that put the number as high as 2 million jobs last week. Buying bonds drives up the price and drives down interest rates. One study estimates that earlier quantitative easing pulled mortgage rates about 0.8 of a percent lower, making housing more affordable and supporting prices.
Second, because monetary policy is the only game in town to improve the economy.
Ever since the 2009 stimulus bill squeaked through Congress, Capitol Hill has declined to pass anything labeled as more stimulus. There are exceptions, the biggest of which was the 2010 payroll tax cut, but the government's $827 billion measure doled out in the heat of the fiscal crisis has run out, and the burst of construction activity and support for many of its clean-energy initiatives has ended.
Indeed, government tax and spending policy is threatening to suck hundreds of billions of dollars out of the economy next year, as the Bush tax cuts and President Obama's payroll tax cut both expire, and more than $1 trillion in spending cuts mandated by last summer's debt-moratorium deal take effect.
That "fiscal cliff" makes the case for more help from the Fed to prop up a struggling economy all the more compelling, IHS Global Insight chief economist Nigel Gault wrote Friday morning. The CBO said the economy will fall back into recession if all of those things are allowed to happen at once.
"The fiscal cliff is not going away,'' Gault wrote.
The Fed will buy as much as $600 billion worth of securities as part of the next round of easing, Gault predicts. And he's betting it will happen next week.
Wall Street got hooked on the narcotic effect that the first round of QE had in lifting stock prices. So it has campaigned for more of the same, although subsequent Fed stimulus measures have had less impact than the first.
"To that extent, bad economic news is good,'' Miller Tabak economic strategist Andrew Wilkinson said in a note this morning. "The rally in risk assets should continue.''
The only thing that would stop the next round of QE was a clear sign that the economy was heating up. And the jobs report gave no such signal.