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david parkinson

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The minutes from the Federal Reserve Board's last policy meeting show a growing confidence that the U.S. economy may soon be ready to shed its monetary-stimulus security blanket. That confidence may be misplaced – or, at least, premature.

The minutes of the March 19-20 meeting of the Federal Open Market Committee (FOMC), released Wednesday, dropped the biggest hints yet that the central bankers are inching toward a gradual end to quantitative easing. Two key elements in their improving confidence: That the U.S. jobs market has shown strong recovery, and that the so-called "sequester" U.S. government budget cuts have so far been a bit of a tempest in an economic teapot.

That was three weeks ago. Since then, the jobs market has become much less of a slam-dunk than it looked at that meeting. March's non-farm payrolls grew a thin 88,000 – less than half of what had been expected, and less than half of the average of nearly 200,000 over the prior six months. Granted, a single month doesn't break the trend – it could well prove to be an outlier. But when the FOMC meets again at the end of April, its members will have to ponder whether the jobs numbers of recent months prior to March weren't overstating the speed of the labour market's recovery – a critical element in the timing of any retreat from monetary stimulus.

And a key factor may be the interplay between jobs and U.S. fiscal restraint.

The FOMC generally felt that while tighter government spending was indeed a drag on overall demand in the U.S. economy, it was being nicely offset by stronger-than-expected economic activity. Some committee members felt fiscal restraints posed less of a risk for the economic outlook than they had during the "fiscal cliff" period in December. A few even "suggested that they had cut their estimates of the effect of recent federal austerity measures or had never considered the effects to be substantial," the minutes said.

Yet the committee acknowledged that businesses "remained cautious about hiring, which some participants attributed in part to restrictive fiscal policy." In other words, the fiscal drag on growth could still put the brakes on hiring.

Former U.S. Labour Secretary Robert Reich, now a professor of public policy at University of California at Berkeley, blogged this week that the impact of the sequester cutbacks has looked understated so far because it takes time for all the federal cuts to trickle down to the plethora of small, localized programs and services that depend on them, and are so widely dispersed that it's often hard to identify how much they are contributing to spending slowdowns and job losses. He argued that the U.S. is still in the early days of the cuts, and their impact will get more evident and pervasive as the year progresses.

"If you thought March's job numbers were disappointing, just wait," he wrote.

And if the Fed thinks backing out of QE is the thing to do, it might have to wait, too.

David Parkinson is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights , and follow David on Twitter at @ParkinsonGlobe .

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