Jobs report likely to force Bernanke's hand

A weak August jobs report signaled hiring continues to slog along at a snail's pace, giving the Federal Reserve even more reason to enact more stimulative measures -- possibly as soon as next week.

The economy added just 96,000 jobs in August. And even though the unemployment rate dipped to 8.1% from 8.3% in July, any number above 8% is still uncomfortably high for the Fed. (Inflation, on the other hand, is comfortably below the Fed's target for 2% a year.)

In a speech in Jackson Hole, Wyo. last week, Ben Bernanke characterized the weak job market as a "grave concern" causing "enormous suffering and waste of human talent" -- one of the strongest statements yet from the Fed chairman.

Bernanke has defended the Fed's efforts so far, including two rounds of large-scale asset purchases known as quantitative easing. Options for more easing could include a third round of asset purchases, nicknamed QE3, or extended guidance on low interest rates. The Fed currently forecasts interest rates will remain "exceptionally low" until late 2014.

Earlier this year, the central bank had pledged to provide more stimulus only if the economy weakened further. Recently that language changed to say the Fed "will act" if the economy merely stays the same.

For the Fed's outlook to change, it would have needed to see a major, sudden improvement – say 300,000 jobs in one month, said Alan Blinder, a Princeton University economist and former Federal Reserve governor. The economy needs about 150,000 jobs a month just to keep up with population growth.

That didn't happen. Making matters worse, the job gains for June and July were revised lower. The Fed's policy-making team meets for two days next week, and Bernanke will discuss their latest decision in a press conference on Thursday afternoon.

Several economists and market experts, including bond king Bill Gross of Pimco, were quick to chime in on Twitter about how the jobs numbers make some move by the Fed far more likely next week.

Gross:Sikorsky helicopter set 4 QE liftoff. Billions of Fed checks ahed. Will it fly?Not like it used 2 but mkts wl ride comfortbly 4 awhile—
(@PIMCO) September 07, 2012

These jobs numbers with the revisions are a game changer, moving fence-sitters at #Fed off the edge into #QE3 next week. #employment report—
Diane Swonk (@DianeSwonk) September 07, 2012

But there are questions about how effective more stimulus from the Fed can really be.

@justinwolfers Agree. QE3 is a near certainty now, + some modest language about future intentions, but it will not be nearly enough—
Joseph Gagnon (@GagnonMacro) September 07, 2012

And one prominent economist, while conceding that the jobs report was terrible, suggests that the Fed may wait until after the presidential election to do something -- even though the Fed has historically shown that it's not afraid to act in the middle of a campaign.

Quite dismal employment report confirming anemic US economic growth. QE3 is only a matter of when not whether, most likely in December—
Nouriel Roubini (@Nouriel) September 07, 2012

Another economist noted that there are other big risks the Fed has to keep in mind, most notably the looming fiscal cliff. So QE3 may not be the last time the Fed has to act before the economy truly gets better.

No matter how big #QE3 cn B, w/ a confused fiscal policy odds R decent 4 QE4, & possibly for more QE's than the Star Wars movies.—
Mario O. Moreno (@MarioMoreno_JoC) September 07, 2012

If that happens, let's hope inflation remains just a "phantom menace" instead of striking back like the Empire.