Fed caution on labor market vindicated by jobs numbers

Federal Reserve Chairman Ben Bernanke's caution about the outlook for the labor market was vindicated by Friday's report that U.S. payroll growth in March was the slowest in nine months.

The 88,000 increase, which was smaller than the most pessimistic forecast in a Bloomberg survey, gives Bernanke and his policymaking colleagues more reason to press on with $85 billion in monthly bond purchases aimed at reducing unemployment, said Julia Coronado, a former Fed economist.

"This validates their caution and keeps policy very much steady as she goes," said Coronado, chief economist for North America at BNP Paribas in New York. "I can't imagine they'd seriously consider tapering QE until much later in the year at the earliest, and that's if all goes well," she said, referring to bond purchases known as quantitative easing.

The Federal Open Market Committee in a March 20 statement said it will continue its asset purchases until the labor market improves "substantially." Bernanke at a news conference that day called employment gains "modest" and said the FOMC wants to see "sustained improvement across a range of indicators."

"It will be several months before we see any discussion about an imminent cutback in the pace of purchases," said Dana Saporta, U.S. economist at Credit Suisse Group AG in New York. The FOMC last month affirmed its bond-buying plan "even in the face of better data," she said. "They wanted to see if the job gains persisted — in retrospect, a wise decision."

In the six months before March, job gains averaged 197,000. The February unemployment rate of 7.7 percent was down from 8.3 percent a year earlier.

Federal Reserve Bank of New York President William Dudley voiced doubt about the durability of employment gains in a March 25 speech.

"The recent improvement in payroll employment growth, which gets much of the attention, is outsized relative to the growth rate of economic activity that supports it," Dudley said to the Economic Club of New York. "We have seen this movie before. When this happened in 2011 and 2012, employment growth subsequently slowed."

The FOMC probably won't adjust its pace of purchases at their next two or three meetings, said Roberto Perli, senior managing director at the International Strategy and Investment Group in Washington, and a former Fed economist. "This is a reminder there might be some bumps along the road here," Perli said. "And so the cautious approach is probably the correct one."