One thing was clear from the Federal Reserve's Open Market Committee (FOMC) statement in September: if the economy deteriorates, the Fed is prepared to take action. It has readied a new asset purchase plan, which would hope to bring longer-term interest rates even lower and spur economic activity. So will the Fed employ this additional quantitative easing (QE) measure at its next meeting this November? At this point, it's looking more and more like a sure thing for three main reasons.
The Labor Market Isn't Improving
Today, ADP reported its worst initial monthly estimate for labor market activity so far this year, with 39,000 jobs lost in September. That implies that the official government report this Friday will also provide a sobering verdict on employment. Although some jobs were added to the private sector over the past several months, the numbers were too low to even keep up with labor market growth. That combined with Census-related jobs ending has caused the unemployment rate to rise slightly. If the trend is getting worse, instead of better, then the Fed will look to its mandate to reduce unemployment and employ a new QE measure.
The Market Has the Fed Backed Into a Corner
At this point, it sort of looks like the Fed has little choice but to expand monetary policy at its next meeting, because the market expects it. After numerous Fed officials have voiced the view that a new QE measure could help, many investors have already begun assuming that the Fed will take action. Consequently, interest rates have already begun falling further.