Watching and Waiting, for the Fed

The October jobs report, strong by recent standards, is likely to increase uncertainty about the Federal Reserve’s plans for the coming months, raising doubts about the current consensus that the Fed won’t pull back until next year.

It’s certainly true that every increase in job growth brings the day of tapering a little bit closer. The federal government now estimates the economy added a monthly average of 202,000 jobs over the last three months. That’s about all it has taken in recent years to make Fed officials start sounding a little giddy.

But the October report, by itself, is not going to decide the debate between Fed officials who want to keep going and those who want to pull back.

1. The Fed doesn’t need to make any decisions right now. The government will publish another monthly jobs report, for November, before the next scheduled meeting of the Fed’s policy-making committee in mid-December.

“Clearly, another report like this one will greatly increase the odds of tapering at that meeting,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics. “Our base case remains that it won’t happen then but the odds have substantially improved already with the release of these numbers.”

2. The impact of the government shutdown on the jobs report has created a communications problem for the Fed. The furloughs of federal workers and contractors in October distorted Friday’s jobs report, and are expected to distort the November report, too. That’s a problem because the Fed under Ben S. Bernanke, its chairman, has made a big point of tying policy to the jobs report. The reported rate of labor force participation, for example, plummeted in October, while the unemployment rate increased slightly. Even if Fed officials conclude that they can see through distortions in the report, the reasoning might prove difficult to explain to investors who have been conditioned to focus on the unemployment rate.

That may make the Fed more likely to wait until January, even if the November report is also strong, wrote Gus Faucher, senior economist at PNC.

3. A separate set of federal data, also published Friday morning, shows that inflation remained sluggish in October. Prices excluding food and energy increased at an annual pace of 1.2 percent, according to the Fed’s preferred measure, the Commerce Department’s index of personal consumption expenditures. Some economists see that as a problem for the economy, as I explained in a recent article. A number of Fed officials see it as an opportunity: So long as inflation remains low, they say, there is little reason for the Fed to rush a decision about tapering.

“For me, you don’t have to be in a hurry because of low inflation,” James Bullard, president of the Federal Reserve Bank of St. Louis, said Monday on CNBC.