WASHINGTON The Federal Reserve looks set to launch a third round of bond purchases this week to try to drive borrowing costs lower and breathe more life into an economy that is not growing fast enough to lower unemployment.
Despite political opposition and some internal dissent, economists said a weak report on jobs growth for August was likely enough to convince the U.S. central bank a looser monetary policy was needed.
"The Federal Reserve will ease again," said Sung Won Sohn, an economics professor at California State University Channel Islands in Camarillo, California. "There are too many people without jobs and the unemployment rate is too high at this stage of an economic recovery."
The economy created just 96,000 jobs in August, well below expectations and less than what is needed to keep up with population growth, a government report showed on Friday.
While the jobless rate declined to 8.1 percent from 8.3 percent, that was only because Americans gave up the hunt for work in droves, further bolstering the case for more bond buying, or quantitative easing.
"This is certainly a disappointing report and increases the odds for QE, which were already reasonably high," said David Sloan, an economist at 4CAST Ltd.
In remarks late last month, Fed Chairman Ben Bernanke laid the groundwork for a third round of bond purchases, or QE3, by calling the stagnation in the labor market "a grave concern."
As part of any new bond buying, many economists think the Fed will return to the housing-related debt purchases it resorted to during the damaging 2007-2009 recession, perhaps buying a mix of mortgage-backed securities and U.S. Treasuries.
Some hope MBS purchases would drive mortgage rates lower and give an extra push to a housing sector that has shown some signs of life recently, boosting economic growth.
But many doubt monetary policy in itself will be able to do much to lend momentum to an expansion that registered a paltry 1.7 percent annual rate in the second quarter.
"QE will boost equities, damage the dollar and do little for the economy, but what else can an activist Fed do?" said Joseph Trevisani, chief market strategist at Worldwide Markets in Woodcliff Lake, New Jersey.
IF NOT NOW, WHEN?
In response to the financial crisis and recession of 2007-2009, the Fed slashed interest rates to effectively zero and bought some $2.3 trillion in mortgage and government debt to push borrowing costs down and support growth.
With global growth slowing, central banks worldwide have been reviewing their options. The European Central Bank decided last week to wade into debt markets to push down borrowing rates for crisis-striken euro-zone nations, and Britain and China have also taken steps to open the monetary spigots.
Not everyone is certain the Fed is quite ready to commit to more bond buying, even though its policy panel will certainly consider such a move at its meeting on Wednesday and Thursday.
"We expect the Federal Open Market Committee to launch another program of long-term securities purchases before the end of the year, focused primarily if not exclusively on mortgage-backed securities," said Michael Hanson, economist at Bank of America-Merrill Lynch.
"This could come at the next week's meeting, but we do not think that this is the most likely outcome," he said.
The Fed will announce its decision at around 12:30 p.m. (1630 GMT) on Thursday.
In a Reuters poll conducted after Friday's jobs numbers, economists gave a 60 percent chance to the Fed embarking on QE3 this week, up from 45 percent in a late August poll. Primary dealer banks, which do business directly with the Fed, saw an even stronger chance of asset purchases.
Many Fed watchers believe any new asset purchase program would be open-ended, unlike the past two cycles of quantitative easing. That would allow the central bank to review the size of its purchases on a frequent basis, perhaps meeting to meeting, and adjust the program as economic circumstances warrant.
Those who believe Bernanke still lacks a consensus for an additional aggressive monetary easing say officials might simply push into the future their guidance for the likely timing of an eventual interest rate hike. Since January, the Fed has said it was likely to hold rates near zero through at least late 2014.
A new round of Fed stimulus would put the central bank under a particularly harsh political spotlight less than two months before a closely contested presidential election.
Republican nominee Mitt Romney on Friday repeated his view that a third installment of unconventional monetary support from the central bank would not do much to lift the economy. He has also vowed not to renominate Bernanke when his term expires in early 2014.
Fed officials have made it clear they plan to focus on the economy - not politics - when making their decisions.
While there have been some signs suggesting growth in the third quarter might be a touch stronger than in the second, economists widely agree the recovery is still too weak to do much to lower unemployment.
The dismal jobs report provided scant comfort on that score.
The Fed will release quarterly economic projections alongside its decision, and they could show officials taking a dimmer view of the future.
Bernanke will also hold a news conference to explain any actions the central bank might take.
(Reporting by Pedro da Costa; editing by Tim Ahmann and Todd Eastham)