James Politi The Fed’s possible “baby-step”

Ben Bernanke may have a few sleepless nights over the weekend as he prepares for Tuesday’s crunch meeting of the Federal Open Market Committee. Clearly, today’s jobs figures will have given him cause for concern. Private sector job creation is anaemic – well below what it takes to keep up with population growth – and well below its pace in March and April. Could the labour market recovery have peaked just after it started ?

Looking to Tuesday, there is no doubt that the pressure is on for the FOMC to begin mapping out a strategy to deal with the “unusual uncertainty” in the US economy that was cited in Mr Bernanke’s congressional testimony last month. But no one is expecting the Fed to begin easing aggressively next week to jolt the sluggish recovery. After all, at its latest meeting, the FOMC set a high bar for easing : economic conditions would have to “worsen appreciably” – which they haven’t even considering today’s figures.

Still, monetary policymakers will have to more seriously examine what their options are. And there may be more than enhanced debate at the meeting. There is one small but significant move that seems to be gaining traction: the reinvestment of proceeds from the Fed’s mortgage portfolio, which current policy would allow to expire.  Economists are already dubbing this a “baby-step” towards easing. While not expanding the  Fed’s  balance sheet, it would be kept from shrinking by more than $100bn - and the Fed could argue that it is not panicking – just simply buying a little insurance against a further deterioration in the economic outlook.