The latest jobs figures from the US leave the Federal Reserve with a real headache.
Only last month, the US central bank cited an improving jobs market as one reason for beginning to throttle back on the monthly stimulus it has been providing to the world's biggest economy. Monthly asset purchases have been cut from $85bn to $75bn and a further $10bn tapering was expected at the Fed's next meeting at the end of this month.
That decision looks far less clear cut following news that the US economy created just 74,000 new jobs in December. To say this came as a shock to the financial markets is a bit of an understatement. Wall Street had been expecting non-farm payrolls to be up by almost 200,000 last month and was caught with its pants down.
The instant response was to blame the weather, but this was not a factor cited when analysts were coming up with their bullish jobs forecasts ahead of the announcement from the labour department. Indeed, it has only been since the turn of the year that the US has been gripped by the big freeze, suggesting that the January non-farm payrolls won't look too clever either.
An alternative theory was that the worse-than-expected jobs data amounted to noise in the system, and that revisions over the coming months would paint a rather more encouraging picture. Somewhat confusingly, although jobs growth was anaemic in December, the same month saw a sharp drop in the unemployment rate from 7% to 6.7%.
It would be a blow to the Fed's credibility to abandon its tapering programme after just a month, so the likely outcome of the meeting at the end of January is that the next $10bn cut in monthly asset purchases will go ahead.
But the central bank is alive to the fact that perhaps the best measure of the health of the labour market, the participation rate, is at its weakest for 35 years. There are still 1.3 million fewer Americans in work than there were before the recession began six years ago, and a further 6.6m jobs would be needed to keep pace with the increased size of the workforce since 2008. The drop in unemployment is largely the result of people dropping out of the labour market because they have given up hope of finding a job.
So make no mistake, this is not an economy firing on all cylinders. While the December payrolls may be a statistical quirk, the recovery in employment has been slow and poor by US standards. The Fed knows that. Expect its new chair, Janet Yellen, to take a suck-it-and-see approach to the taper, and to be even more committed to keeping interest rates low.
(c) 2014 Guardian Newspapers Limited.
Original headline: US jobs figures leave Fed in a fix
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