Jobs numbers give Fed cover story for rate cut

The U.S. lost 4,000 jobs in August, the Labor Department reported today -- the first time that's happened in four years. The U.S. also added fewer jobs in June and July than previously thought -- 69,000 in June, not 126,000 as first reported, and 68,000 in July, instead of 92,000.

The news sent stocks plummeting, but also raised expectations the Federal Reserve's Open Market Committee will lower the target for the federal funds rate when it meets Sept. 18.

The real estate, mortgage banking and housing industries have been clamoring for cuts, saying that would make borrowing easier and provide some relief from the credit crunch in mortgage lending.

Mortgage broker and Inman News columnist Lou Barnes writes today that the latest news on jobs demonstrates "The Fed has either missed it all, misunderstood it all, or has no idea what to do about it. Yesterday's all-OK brigade of Fed speakers look ... say it: incompetent."

The debate is now whether the cut will be 25 or 50 basis points, Lehman Brothers economist Zach Pandl tells the Associated Press.

Not everybody's so certain.

As noted here last week, Bernanke recently delivered a lengthy speech that included a lesson on the history of mortgage lending, in which he argued that the Fed has less influence on the availability of mortgage credit these days. There's not as strong a link between downturns in the housing cycle and the economy in general as there once was, Bernanke claimed.

The "sharp slowdown in housing has been accompanied, at least thus far, by relatively good performance in other sectors," Bernanke said.

It's not hard to read the speech as laying the groundwork for a decision to leave the federal funds rate alone. Or Bernanke could have just been defending the Fed from accusations that it created the current mess by slashing the federal funds rate to the bone after the dot-com bust to encourage growth -- prompting a boom in mortgage lending that helped push home prices up -- before raising it 17 straight times to 5.25 percent (and helping bring things to a crashing halt, critics say).

 Bernanke and friends have been reluctant to lower the federal funds rate because such a move comes with consequences -- like devaluing the dollar and increasing the risk of inflation. That could prompt investors to move their money out of dollar-based assets and into investments like gold.

The economy grew at an annual rate of 4 percent pace from April to June -- about as fast as the Fed's comfortable with. But some say the downturn in many housing markets will put a crimp in consumer spending, which accounts for about two-thirds of economic activity.

The blog Calculated Risk makes a convincing argument that consumer spending has been strong because homeowners were able to take equity out of their homes -- but that those days are over.

Daniel Gross, in his latest Moneybox column at Slate, says today that American's "preternatural ability to spend" during this decade has depended on three legs: the ability to tap into home equity, cheap and plentiful credit for the rich and poor alike, and job growth.

The first two legs are gone, Gross says, and today's job numbers "indicates that a beaver is gnawing through the last leg." The rich, who do most of the consuming in the U.S., don't appear to have reined in their spending and may be continuing to prop up the economy for now, Gross writes.

Despite all the news about falling home prices, there are still commodities going in the other direction -- like wheat and oil -- that could drive inflation.

Regardless of whether a cut in the federal funds rate is the best thing for the economy in the long run, the latest job numbers could give Bernanke and friends cover should they decide to reverse course and lower the federal funds rate when they meet the Tuesday after next. The expectations of a rate cut have grown so high that it's bound to be ugly if they don't.

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