Total nonfarm payrolls rose by 243,000 in January, surpassing all analysts’ expectations and creating a wave of optimism in the financial markets.

The more positive labor outlook may shed some doubt on the Federal Reserve’s recent assessment of holding its benchmark federal funds rate at zero to .25 percent “at least through late 2014.”

The Fed’s decision was based in large part on a still elevated unemployment rate.

“Further Fed stimulus is probably limited at this point,” John Silvia, chief economist at Wells Fargo Securities, told Bloomberg. “The drop in the unemployment rate has to be very, very positive from the Fed’s point of view.”

The Department of Labor data also contrasts with recent economic reports that showed a possibly slower economic recovery than earlier projected. The U.S. economy grew at a 2.8 percent annual rate in the final three months of 2011, up from 1.8 percent in the third quarter.

However, the rebuilding of stocks by businesses represented the vast majority of the increase, possible indicating a slower growth pace this quarter.

The central bank last week said it expects the unemployment rate to fall to between 8.2 percent and 8.5 percent in 2012, an improvement over what it had predicted this past November. But the Fed is also predicting the economy will grow between 2.2 percent and 2.7 percent this year, slightly slower than it previously projected.

Dissenting from his colleagues, Philadelphia Federal Reserve President Charles Plosser said in a speech this week that the long-range, near-zero rate posture is “undermining” confidence in monetary policy.

However, there are other areas of the economy that are persistently worrisome, primarily the housing sector still mired deep in foreclosures and falling home prices. Moreover, consumer spending has remained flat.

“Certainly the Fed will welcome it (today’s jobs report) but they remain worried about other areas of the economy, namely housing. This should not change its view on the economy,” Andrew Wilkinson, chief economic strategist at Miller Tabak & Co. in New York, told Reuters.

In its report today, the Labor Department said private-sector employment in January grew by 257,000 jobs, with the largest employment gains in professional and business services, leisure and hospitality, and manufacturing. Government employment was little changed over the month.

In January, average hourly earnings for all employees on private nonfarm payrolls rose by 4 cents, or 0.2 percent, to $23.29. Over the past 12 months, average hourly earnings have increased by 1.9 percent.

The number of unemployed persons declined to 12.8 million in January

In January, the number of those of lost jobs and those who completed temporary jobs fell to 7.3 million. The number of long-term unemployed – those jobless for 27 weeks or more – was little changed at 5.5 million and accounted for 42.9 percent of the unemployed.

The number of persons employed part time for economic reasons in January was at 8.2 million, changing little from December. These individuals were working part time because their hours had been cut back or because they were unable to find a full-time job.

Overall, the changes would give retirees greater flexibility and possibly remove the  stigma on annuities – an option offered by fewer 401(k) plans and often avoided by senior investors unwilling or too apprehensive to turn over their savings to an insurance company.

The rule changes aim to make it easier to offer combination options that avoid an “all-or-nothing” choice of an annuity or “lump sum,” the Treasury said. The proposal must go through a customary public discussion period before being finalized later this year.

The U.S. Department of Labor’s Employee Benefits Security Administration today issued a “final rule” for employers sponsoring pension and 401(k) plans that provide information on the administrative and investment costs associated with providing such plans to their workers.

“When American workers take the responsible step of saving for retirement, we should do all we can to provide them with sensible, accessible choices for managing their hard-earned savings,” said Treasury Secretary Tim Geithner. “Having the ability to choose from expanded options will help retirees and their families achieve both greater value and security

The Treasury proposal modifies a requirement to make it simpler for specific benefit pension plans to offer combinations of lifetime income and a single-sum, or “lump sum,” cash payment.

The change is designed to encourage more retirees to consider partial annuities. These allow retirees to receive a steady stream of income for the duration of their lifetimes, while also keeping a portion of their savings invested in assets along with the flexibility of liquidity if financials needs arise.

Another component of the proposal expands on this “combination approach” by removing a regulatory hurdle to purchasing a deferred “longevity” annuity. This would make it easier for retirees to use a limited portion of their savings to purchase guaranteed income for life – starting at an advanced age, such as average life expectancy.

Such longevity annuities would provide an effective method for 65- or 70-year-olds to diminish the risk of outliving their assets by purchasing a predictable income stream starting at age 80 or 85, the Treasury said.

Once this “longevity” risk is addressed, a retiree’s ability to generate income from the remaining assets is more manageable because it is limited to a fixed period of time.

See the Treasury’s fact sheet on the proposed changes.

Facing an already-divided Congress during an election year, the president emphasized that a previously-mandated fee on the largest financial institutions would offset the cost.

A proposal to help responsible borrowers who can’t otherwise qualify for refinancing into today’s historically low interest rates first surfaced during Obama’s state of the union address.

The Obama Administration has struggled with its numerous programs to rescue homeowners facing foreclosure and others designed to help those out of negative equity.

An estimated one-third of U.S. homeowners owe more on their mortgages than the value of their homes.

Borrowers with private mortgages – not those held or backed by Fannie Mae or Freddie Mac – would save about $3,000 a year by refinancing into current long-term rates, which are hovering at or below 4 percent.

The administration’s proposal would triple the incentives to private lenders to reduce the principal for underwater borrowers.

Currently, the owner of a loan that qualifies for the government’s Home Affordable Modification Program (HAMP) receives between 6 and 21 cents on the dollar to write down principal on that loan, depending on the degree of change in the loan-to-value ratio.

To increase the amount of principal that is written down, the Treasury would triple those incentives, paying from 18 to 63 cents on the dollar.

Under the proposal, borrowers with loans insured by Fannie Mae or Freddie Mac will have access to streamlined refinancing through the two government-subsidized entities. Borrowers with standard non-Fannie or Freddie loans will have access to refinancing through the new program run by the Federal Housing Administration (FHA).

The administration estimates the cost of its refinancing plan to be in the range of $5 to $10 billion, “depending on exact parameters and take-up,” according to a White House statement.

This cost will be “fully offset” by using a portion of the President’s proposed Financial Crisis Responsibility Fee. The fee is part of the Dodd-Frank reform legislation enacted in 2010 and is to be imposed on the largest financial institutions, based on their size and the riskiness of their activities.

“This ensures that the program does not add a dime to the deficit,” the White House statement said.

Any borrower with a loan that is not currently guaranteed by Fannie or Freddie can qualify if they meet the following criteria:

• They are current on their mortgage: Borrowers will need to have been current on their loan for the past 6 months and have missed no more than one payment in the 6 months prior;
• They meet a minimum credit score. Borrowers must have a current FICO score of 580 to be eligible. Approximately 9 in 10 borrowers have a credit score adequate to meet that requirement;
• They have a loan that is no larger than the current FHA conforming loan limits in their area: Currently, FHA limits vary geographically with the median area home price – set at $271,050 in lowest cost areas and as high as $729,750 in the highest cost areas;
• The loan they are refinancing is for a single family, owner-occupied principal residence.  This will ensure that the program is focused on responsible homeowners trying to stay in their homes.

Under the new plan, all underwater borrowers who decide to participate in either an existing government refinancing program or the new one through the FHA will have a choice to take the benefit of the reduced interest rate in the form of lower monthly payments – or they can apply that savings to rebuilding equity in their homes through a loan term of 20 years.

The shorter-term loan will give the majority of underwater borrowers the chance to get back above water within five years or less.

To encourage borrowers to make that decision, the administration is proposing that the legislation provide for Fannie and Freddie and the FHA to cover the closing costs of borrowers who chose this option – a benefit averaging about $3,000 per homeowner.

To be eligible, a participant in either program must agree to refinance into a loan with a no more than a 20-year term, with monthly payments roughly equal to those they make under their current loan.

Philadelphia Federal Reserve President Charles Plosser told a business audience today in Gladwyne, Pennsylvania that forecasting far ahead as the Fed has emphasized most recently could be problematic and already has caused confusion.

Last week, the Fed held its benchmark federal funds rate at zero to .25 percent “at least through late 2014.” In doing so, the Fed pushed back considerably – by 18 months – its previous stance of keeping rates exceptionally low through mid-2013.

“Monetary policy should be contingent on the economic environment and not on the calendar,” said Plosser, who dissented from the Federal Open Market Committee’s decisions in August and September for further monetary policy accommodations.

With U.S. economic conditions improving, Plosser said he saw little justification for extending the federal funds rate at near zero for three more years.

“In my view, economic conditions have modestly improved since our December meeting, especially on the employment front, and the downside risk of a double-dip recession that many feared in September … has substantially abated,” Plosser said. “Thus, with the economy gradually improving, I saw little justification to further ease monetary policy and felt it risked undermining confidence in the process.”

Plosser said that the long-range forecast has created misinterpretations in the media.

“For example, I often read comments in the media that the FOMC has ‘pledged’ or ‘vowed’ to keep rates at zero at least until late 2014,” he said. “But this is clearly incorrect. The FOMC has made no such commitment and the statement indicates as much — if economic conditions change, then so will policy.”

Plosser did praise the newly expanded forecasting method released by the FOMC in January, which provided the policy path for each committee participant’s forecast. And he praised the central bank’s overall effort to improve transparency, even if he doesn’t agree with the extent or degree of monetary policy accommodations.

“Transparency not only furthers the effectiveness of monetary policy by enhancing the credibility of the central bank but also raises the Fed’s accountability to the public,” Plosser said.

That report has drawn a rare statement from the regulator of both Freddie and Fannie Mae. It has also brought a comment from the White House that downplays the “betting against homeowners” scenario – through purchases of complex securities – and distances itself from the actions of Freddie.

However, White House spokesman Jay Carney said the U.S. Treasury is investigating the report.

“Well, we saw those reports and they certainly raise some concerns,” Carney said. “As you know, this is an independent institution with independent governance, so we don’t make those kinds of decisions.  But I believe Treasury is looking into it.”

The Federal Housing Finance Agency independently regulates Fannie and Freddie, but taxpayers subsidize the mortgage financing giants through quarterly bailouts from the Treasury.  A running total of bailout requests by both firms may reach $200 billion this year.

The report on Freddie’s investments came just as the Obama administration has been intensifying efforts to have Fannie Mae and Freddie Mac ease refinancing rules for homeowners, especially those who owe more on their mortgages than their homes are worth.

Freddie Mac currently holds $5 billion worth of “inverse floater” securities — basically the interest-paying portion of a bundle of mortgages — for its investment portfolio. In the past, Freddie has purchased the inverse floaters, while selling the far less risky principal portion of these securities. Overall, Fannie and Freddie are decreasing the size of their investment portfolios.

In its statement, Fannie and Freddie’s regulator, the Federal Housing Finance Agency, said it requested that Freddie Mac stop purchasing these securities last year. Freddie Mac agreed to this request in December.

“A further assessment … in 2011 by FHFA supervision staff identified concerns regarding the controls, including risk management, surrounding the inverse floaters,” Freddie’s regulator said.

But the regulator denied any connection between the investment strategy and any guideline changes to its Home Affordable Refinance Program (HARP) for homeowners.

“In evaluating changes to HARP, FHFA specifically directed both (Fannie and Freddie) not to consider changes in their own investment income as part of the HARP evaluation process,” the regulator said. “FHFA and the Enterprises (Fannie and Freddie) remain fully committed to the success of HARP as it is a valuable tool to lessen the Enterprises’ credit risk and provide assistance to borrowers seeking to refinance.”

But Freddie has kept strict standards for refinancing for many homeowners, including the requirement of risk-based fees for some borrowers.

The Treasury announced last week that it would offer incentives for the first time to Fannie and Freddie to forgive portions of homeowner debt on mortgages they own. The two entities own or back half of U.S. mortgages.

But Fannie and Freddie said they would review the incentives proposal. They have previously refused to take part in principal write-downs, claiming that it would create unnecessary losses for taxpayers.

Meanwhile, mortgage rates remain at or near historic lows, with the 30-fixed rate just under 4 percent.

The campaign is necessary because one-third of the eligible population changes annually as their financial, marital and parental statuses change, the IRS said.

Although an estimated four out of five eligible workers and families get the credit – that leaves one in five that either don’t claim it, or don’t file a return at all.

“The EITC provides a financial boost for millions of hard-working Americans,” said IRS Commissioner Doug Shulman in a statement. “But people can easily overlook this important credit, especially if their financial situation has changed. The IRS reminds taxpayers to look into this valuable credit to see if they qualify.”

The EITC varies by income, family size and filing status.

You can determine if you qualify by visiting IRS.gov and answering a few questions using the EITC Assistant.

In tax year 2010, almost 26.8 million eligible workers and families received over $59.5 billion total in EITC. The average EITC amount last year was about $2,200.

Workers who earned $49,078 or less from wages, self-employment or farm income last year could receive larger refunds if they qualify for the EITC.

That could mean up to $464 in EITC for those without children, and a maximum credit of up to $5,751 for those with three or more qualifying children.

Unlike most deductions and credits, the EITC is refundable – eligible people may get a refund from the IRS even if they owe no tax.

To get the EITC, workers must file a tax return, even if they are not required to file, and specifically claim the credit.

The IRS said those eligible for the EITC have free options to file a tax return and claim the credit:

• Free File on IRS.gov: Free brand-name tax software walks people through a question and answer format to help prepare their returns and claim every credit and deduction for which they are eligible. The program also allows people to file electronically for free, giving them access to all their money often in as little as ten days.
• Free tax preparation sites: EITC-eligible workers can seek free tax preparation at more than 12,000 Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) sites. To locate the nearest VITA site, people can call the IRS at 800-906-9887. Taxpayers can also find VITA/TCE sites by calling their community’s 211 or 311 line for local services.
• IRS Taxpayer Assistance Centers: EITC-eligible workers can seek free assistance in IRS locations across the country. Locations are listed online at www.IRS.gov. Hours and services offered vary by location and should be checked before visiting.

The proposal from the administration requires Congressional approval and was mentioned in this week’s state of the union address.

“We can’t just keep subsidizing skyrocketing tuition; we’ll run out of money,” Obama told the nation this week. “States also need to do their part, by making higher education a higher priority in their budgets.  And colleges and universities have to do their part by working to keep costs down.”

The administration is proposing to increase campus-based aid to about $10 billion a year, up from $1 billion, for institutions that control tuition costs.  About $8 billion, of that amount would be devoted to Perkins Loans for students, with other aid set aside for work-study grants and Supplemental Educational Opportunity Grants (SEOG).

Obama’s plan calls for $1 billion in incentives for states to help keep costs down at public colleges, while encouraging an overhaul of state programs that help finance education. He is also proposing $55 million for colleges as an incentive to improve education quality.

Congress would be required to approve the proposals, which will be detailed in the president’s fiscal 2013 budget to lawmakers on Feb. 13.

“Students will receive the greatest government grant and loan support at colleges where they are likely to be best served, and little or no campus aid will flow to colleges that fail to meet affordability and value standards,” according to a White House statement.

The campus-based aid that the federal government currently provides to colleges through Supplemental Educational Opportunity Grants (SEOG), Perkins Loans, and Work Study is “distributed under an antiquated formula that rewards colleges for longevity in the program and provides no incentive to keep tuition costs low,” the White House said.

In doing so, the Fed pushed back considerably – by 18 months – its previous stance of keeping rates exceptionally low through mid-2013.

The Fed’s decision – based in large part on a still elevated unemployment rate – means mortgage rates and equity lines of credit will likely continue to hover near record lows for 2012 and into next year, barring an unforeseen faster recovery for the housing market.

It also means that an economic recovery warranting higher rates is another three years away.

The Fed reported that 6 of the 17 members of the committee expected that the central bank would raise interest rates to somewhere between 1 percent and 3 percent by the end of 2014. The remaining 11 members project that the Fed will hold rates at or below 1 percent by the end of 2014.

The Fed is giving a breakdown of interest rate forecasts from its committee members for the first time as part of a campaign of greater transparency. It also hopes the long range projections will stimulate the economy by keeping rates low on mortgages, and car and student loans.

The central bank said it expects the unemployment rate to fall to between 8.2 percent and 8.5 percent in 2012, an improvement over what it had predicted this past November. But the Fed is also predicting the economy will grow between 2.2 percent and 2.7 percent this year, slightly slower than it previously projected.

The unemployment rate is currently at 8.5 percent.

By 2014, the Fed anticipates the unemployment rate to fall to between 6.7 percent and 7.6 percent, also slightly lower than it previously thought.

Fed members expect that the unemployment rate will decline gradually “toward levels that the Committee judges to be consistent with its dual mandate” of fostering maximum employment and price stability.

“While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated,” the Fed said in its overview of this week’s Federal Open Market Committee meeting.  “Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed.”

The Fed also said inflation has been subdued in recent months, and longer-term inflation is expected to remain stable.

Banks use the target funds rate set by the central bank as a benchmark for setting interest rates for prime loan customers. A higher funds rate would mean subsequent higher rates on credit cards, home equity lines and mortgages.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Dennis P. Lockhart; Sandra Pianalto; Sarah Bloom Raskin; Daniel K. Tarullo; John C. Williams; and Janet L. Yellen.  Voting against the action was Jeffrey M. Lacker, who preferred to omit the description of the time period over which economic conditions are likely to warrant exceptionally low levels of the federal funds rate.

The program is meant to help borrowers who may be “underwater” on the loans, owing more than the value of their homes, and who have been making their payments on time.

It also targets those borrowers whose loans are held by private companies and are not currently subject to refinancing opportunities.

Existing refinancing programs only assist borrowers whose loans are owned by government-operated entities, Fannie Mae and Freddie Mac. Other than a mention during last night’s state of the union address, the Obama administration has yet to release more details of the proposed legislation.

The plan would require Congressional approval; however, some Republicans may support expanded refinancing programs, even in the politically divisive current atmosphere.

“… Responsible homeowners shouldn’t have to sit and wait for the housing market to hit bottom to get some relief,” Obama said in his state of the union address. “And that’s why I’m sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low rates.  No more red tape.  No more runaround from the banks.”

Obama said “a small fee on the largest financial institutions” would ensure that the refinancing program won’t add to the U.S. deficit and will give those banks that were bailed out by taxpayers “a chance to repay a deficit of trust.”

The proposed program would target up to 3 million homeowners and is not necessarily targeting those borrowers who are facing foreclosure – but those who are making their mortgage payments on time. Their extra cash from refinancing would bolster the economy, Obama administration officials say.

The new effort to review the questionable – and possibly illegal – issuing and securitization of risky subprime mortgages is separate from an existing investigation by state attorneys general into the so-called “robo-signing” of falsely processed foreclosures documents.

More than a million foreclosure victims reportedly will be compensated and their mortgages refinanced or principals reduced under a draft settlement that has yet to be finalized with the five biggest lenders.

The president’s new team of prosecutors will focus on the larger-scale mortgage abuses.

Eric Schneiderman, the New York attorney general, will head the new “Unit on Mortgage Origination and Securitization Abuses,” according to a report in the Huffington Post.  The unit will focus on misconduct by lenders and others that led to the housing market collapse four years ago.

“… I am asking my Attorney General to create a special unit of federal prosecutors and leading state attorneys general to expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis,” Obama said in his state of the union. “This new unit will hold accountable those who broke the law, speed assistance to homeowners, and help turn the page on an era of recklessness that hurt so many Americans.”

Some state prosecutors and consumer groups, including Schneiderman, have expressed discontent with the pending settlement in the “robo-signing” scandal. They contend that more investigations are warranted and that any settlement should not impede future legal actions against the banks.

“The goal of this joint investigation will be threefold: to hold accountable any institutions that violated the law; to compensate victims and help provide relief for homeowners struggling from the collapse of the housing market, caused in part by this wrongdoing; and to help us finally turn the page on this destructive period in our nation’s history,” reads a White House document, according to the Huffington Post.