This has got to have been a frustrating jobs report for Janet Yellen and her colleagues at the Fed.
For stock market and other risky asset investors hoping for more stimulus it may turn out even worse.
U.S. payrolls rose by 113,000 in January, with only paltry revisions to the previous month's disappointing 75,000 total. The data colored in a picture of a gradually weakening economy at worst, or at best one which is far from escape velocity.
But unemployment fell to a five-year low of 6.6 percent, just above the threshold chosen by the Fed as a potential key milestone on the road to raising interest rates.
Note too that the growth in construction jobs somewhat undermined arguments that the problems are principally down to exceptionally cold weather. And while retail jobs took a hit, that may well be simply part of a huge secular shift away from physical retail.
No one, of course, believed that the Fed was close to raising rates before this data, and certainly no-one thinks they are any closer now. What these numbers do is raise the chances that the economy is on the slide, without raising by a similar amount the chances that the Fed will actually do anything about it by pausing or even reversing the taper.
As that sinks in, it will pose problems for riskier assets, particularly emerging markets but also U.S. equities.
With no Fed meeting until mid-March, risk investors have to believe one of two things to be optimistic: that things are better than they seem; or that the Fed will say something about its intention to offset weakness. While the first is always possible, the second seems unlikely.
Since the Fed zigged when the market expected it to zag both in September, when it didn't taper, and December, when it did, Janet Yellen as newly installed Fed chair is just slightly trapped. To give signs now that she is mulling yet another reverse is to spend credibility she may not yet have banked.
Beyond that a move towards slowing or suspending the taper, much less reversing it, would be highly divisive within the Federal Open Market Committee, where a small rump are skeptical about quantitative easing's benefits and very sensitive to its risks.
CONGRESSIONAL TESTIMONY DRAMA
Yellen is going to have a bit of a job in front of her on Tuesday, when she makes her first appearance as Fed chair to make the Semiannual Monetary Policy Report to Congress, formerly known as Humphrey-Hawkins testimony.
"Yellen will say they are tapering but spend more time explaining why that does not mean the Fed will be tightening aggressively," Steve Englander, foreign exchange strategist at Citigroup, wrote to clients after the payrolls data release.
"The motivation for tapering is that it is politically noxious and it is easier for the Fed now to provide stimulus by forward guidance."
That's probably close to what Yellen will say, but both points are highly debatable.
While an improving federal budget does lessen the impact of the taper, you only need to look at the amount of money flowing out of emerging market and high-yield investments to understand that it has real financial market impacts. Conditions are genuinely tighter for a large swathe of borrowers today, and are likely to get tighter yet in several months. That U.S. 30-year mortgage rates are creeping down towards 4 percent again only gives the Fed one less reason to be concerned with riskier investments.
As for forward guidance, well I'd just present the unemployment rate, which was supposed to play a key role in forward guidance, as evidence of how difficult it can be to execute and control loosening and tightening with words and targets. It must be only a very small group who believe both in the Fed's forecasting and in its ability to stick with its guidance in an uncertain world.
The other larger question is just how bad things would have to get for the Fed to actually reverse course on the taper. While the evidence that QE leads to asset price rises is good, claims that it actually gooses employment or leads to substantial gains in output are less strong.
All may well end well, the economy may be doing better than it looks right now, and employment may rise like sap in spring.
If not, however, the Fed will be left just a bit short, hard by the zero lower bound of interest rates with one politically expensive and unpopular tool, QE, and one, forward guidance, which has all the power of a promise.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at email@example.com and find more columns at blogs.reuters.com/james-saft)
(James Saft is a Reuters columnist. The opinions expressed are his own)
(Editing by James Dalgleish)