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Because economists have said the U.S. needs to create about 100,000 jobs each month to keep up with new entrants to the workforce, and payrolls have fallen for the second straight month, then the recession must officially be here. The jobs report says so.

Early Friday, the Labor Department said U.S. employers shed more jobs last month than in any month in almost five years. Payrolls fell by 63,000 in February, and January’s 17,000 decline was revised lower to 22,000.

The latest figures pushed the three-month moving average to a 15,000 decline, the lowest level since July 2003.

“Today’s jobs report is the nail in the recession coffin as the losses in payrolls are not only deepening but also broadening into other sectors,” said CMC Markets Chief Forex Strategist Ashraf Laidi. He added that annual inflation above 4.0% and annual average hourly earnings growth at less than 4.0%, puts real earnings at their lowest in two years.

Bernanke may have already hinted that the U.S. is in a recession when he said today’s conditions are more challenging than in 2001, Laidi said. This downturn will be especially challenging, bearing “an ominous combination of the worst of the last three recessions; namely rising inflation of the early 1980s; surging oil prices and housing recession of 1989-90; and falling equity markets of 2001-02.”

“The 63,000 drop in Feb., and the directional change in the last three months is consistent with recession, though the 4.8% unemployment rate is not,” said Joeff Hall, Thomson Financial managing economist. “I’m discouraged by the lack of job creation, but I believe firms are holding back on hiring because of uncertainty rather than outright economic conditions. That said, the worsening credit crisis is making it tougher for me to cheer about this economy.”

Despite the jobs report, which was distinctly worse than the 25,000 job gain which analysts polled by Thomson’s IFR Markets had expected, stock markets and equity futures rose earlier in the session after the Federal Reserve announced it will raise the amount of liquidity in its TAF auctions to $100 billion to “address heightened liquidity pressures in term funding markets.” Investors took back gains, however, and the Dow Jones Industrial Average lost 146 points by the end of the session.

Laidi predicts that, despite the Fed’s stepping up of liquidity operations, it will be forced to slash benchmark interest rates to 2.00% by end of the second quarter. He sees about a 70% chance of 1.50% Fed funds rate by end of year. The payroll report, he added, is an “indisputable negative for the already damaged dollar especially considering the [European Central Bank's] tacit support for its record-high euro.” Nonetheless, the U.S. dollar index ended 5 cents higher at $73.04.

One question to ask is how could job report estimates have been so wrong. Part of the answer, Laidi said, is related to why most economists never expected rate cuts in 2007, or recession in 2008.

Federal Reserve Chairman Ben Bernanke is fighting a three-front war: recession, inflation, and credit market depression. The question, then: Is the Fed capable?

The Fed has cut rates and taken a series of liquidity-boosting measures over the past few months, yet there’s no sign the credit market crisis is receding; the U.S. economy remains on track for a recession.

The Federal Reserve said on Friday it’ll raise the total size of its March TAF (Term Auction Facilities) auctions to $100 billion and begin 28-day term repurchase agreements that are expected to total $100 billion, to “address heightened liquidity pressures in term funding markets.” The TAF is a targeted facility that allows banks to access funds at interest rates lower than those offered at the discount window. The Fed also said it’ll expand the ways it delivers liquidity to banks, which includes using less-liquid assets as collateral for term repurchase transactions.

You can bring a horse to water, but you can’t make it drink. Senior Fed officials warned that while these decisions were in response to the rapid deterioration in term funding markets, they are not sure their new measures will calm the turmoil in the credit markets.

Financial markets are still expecting the Fed to aggressively lower interest rates in the coming months. An Action Economics weekly survey showed all are expecting at least a 50-basis points reduction in the federal funds rate to 2.5% from the current 3% by the March 18 policy-setting meeting. According to the survey, fed funds estimates ranged from 2.50% to 2.25% for the March policy meeting, and 2.5% to 1.5% by June.

But the question remains: is it possible that no matter how low the Fed cut rates, it won’t stop the economy and credit markets from worsening? New York Fed President Timothy Geithner said very directly in a speech Thursday that “even with those reductions in short-term interest rates in place, financial conditions have tightened as risk spreads on a wide range of asset classes and institutions have increased considerably.” He said “we cannot know with confidence today what level of the short-term real funds rate will be consistent with our objectives of sustainable growth and low inflation.”

Tony Crescenzi, market strategist at Miller Tabak, is more optimistic, believing the Fed still has more aces up its sleeve. if the Fed’s new TAF measures fail, and if the term markets seize up, Crescenzi said he would expect that “the Fed would consider purchasing agencies for their own account.”

“The Fed currently owns only Treasuries but has the authority to buy agencies,” he said. “Another possibility mentioned by Bernanke in 2002 is the idea that the Fed would buy long-term Treasuries. These are both extreme measures but they are potent tools.”