A month ago a debate over a third round of quantitative easing seemed unlikely. The labor market appeared to be gaining traction and manufacturing was a surprising bright spot in an otherwise sluggish but steady recovery.
A flood of dismaying economic data this week, including shockingly bad May job numbers released on Friday, has revived the issue, however.
The May jobs report showed the U.S. added just 54,000 jobs last month, the lowest figure since the fall. The unemployment rate jumped to 9.1% from 9%. In the three previous months the U.S. added an average of 220,000 jobs.
Suddenly another round of debt purchases by the Federal Reserve -- dubbed QE3 -- is back on the hypothetical table.
It is very possible. In fact, the likelihood is growing, said Cliff Waldman, an economist for the Manufacturers Alliance/MAPI, a public policy and economics research organization in Arlington, Va.
I expect the Fed is going to look at the landscape and very sharp slowdown that weve experienced recently, and looking at all the data theyre going to determine we need all the help we can get, Waldman added.
At least one high-profile market guru thinks its not going to happen.
PIMCOs Bill Gross, manager of the worlds largest bond fund, said in a radio interview with Bloomberg that the Fed will likely maintain its current easy money policies beyond the date when it had hoped to start tightening.
We dont see a QE3. There has been too much discussion and dissent within the Fed to permit that type of program, Gross said in the interview.
The startling downturn in the labor market highlighted a week in which housing and manufacturing data also disappointed. A widely watched housing index showed home prices in many U.S. cities have fallen to their lowest level in nearly a decade with no bottom in sight, and manufacturing data showed that once promising sector had also faltered.
Most disturbing to Waldman was the decline in the Institute of Supply Managements widely-watched manufacturing survey, which fell to 53.5 in May from 60.4 a month earlier.
Manufacturing had been a lone source of optimism for months as other areas of the U.S. economy struggled. But for a number of reasons, not least supply disruptions due to the earthquake and Tsunami in Japan, that sector also took a hit in May.
Waldman said another round of quantitative easing, a practice in which the government buys billions of dollars of U.S. Treasuries to pump money into the economy and spur economic activity, might be a last defense against another deep recession.
The Feds monetary policy has been defensive now for over two years, Waldman explained, all in an effort to lift the U.S. from the worst economic downturn since the Great Depression.
The Fed has kept interest rates at a range of 0-0.25% since December 2008, and the first two rounds of quantitative easing came at a cost of nearly $3 trillion. The second round of Fed bond buying -- $600 billion worth -- is scheduled to end this month.
The question of whether or not these programs have been successful seems to answer itself. If they had been successful thered be no debate about a third round.
Waldman said the first two quantitative easing programs were mistakenly called stimulus packages. In fact, they were intended to keep the U.S. from tumbling deeper into an economic abyss. In that context they were successful, he said.
QE3 would be no different.
(Fed members) arent under the illusion -- and no one should be under the illusion -- that this is going to stimulate anything. Rather its to prevent another crisis -- to keep the floor from falling out from beneath us, he said.
The current recovery, described by many economists as the most sluggish in the post World War II period, has been vulnerable all along. That vulnerability was exposed earlier this year when commodity prices soared on political turbulence in the Middle East and natural disasters in Japan and the U.S.
Higher prices have crimped consumer spending, making a weak recovery even weaker. Thus the debate over QE3.