Weak jobs report puts a dampener on the Fed’s increasingly hawkish policy stance

The latest jobs report in the US showed the US economy adding 103,000 jobs. Median expectations had been for nonfarm payrolls to increase by 193,000. In this latest report, the unemployment rate remained steady at 4.1%. Expectations were for the rate to fall to 4.0%. Overall, these numbers will give the Fed pause in accelerating its interest rate increases.

Parsing some of the jobs data

Here are some of the factoids that data analysts are looking at:

  • There was an upward revision to February data, but a big downward revision to January.  February revised up to +326,000 from +313,000. January revised down to +176,000 from +239,000. That’s a net -50,000 from revisions.
  • Average hourly earnings were +0.3 month-on-month versus 0.2% expected. Average hourly earnings rose by 8 cents to $26.82 in March. That’s an increase of 71 cents or 2.72% in the past 12 months
  • Thsi marks the 90th month of job creation in the US since October 2010. The unemployment rate then was 9.4%. This is the longest such streak in data history, going back all the way to the 1930s.
  • The headline unemployment rate, at 4.071%, is lower than every single month for the almost three decades between February 1970 and November 1999.
  • The spread between the headline rate (U3) and the most expansive rate of unemployment (U6) is at its lowest level during this business cycle.

It’s all about inflation now

The big picture is this: with unemployment now near the 4% threshold, the headline numbers are below what the Fed believes is the longer-term level of unemployment at which inflation will remain stable and low. In terms of the Fed’s dual mandate, then, most Fed officials have put a check box next to the employment box.

Lingering concerns about long-term unemployment notwithstanding, inflation has taken center stage. The inflation rate the Fed uses remains below its longer term target. But the Fed wants to act in anticipation of inflation, to avoid getting ‘behind the curve’. So now, any sign of inflation will be met with an acceleration of the Fed’s rate hike timetable. And jobs numbers like the ones we saw today give the Fed more license to take this approach.

Takeaways from the March 2018 Jobs Report

The report was weaker than expected. But nothing in this report will cause the Fed any concern about the economic picture in the US. Lower than expected jobs numbers were met by higher than expected hourly earnings growth. What matters is that the predominant view at the Fed now is that we are at or below the level of employment which keeps inflation in check.

Just this week, Fed Governor Lael Brainard talked about her concerns that lower unemployment would mean higher inflation or asset bubbles and financial crisis. For now, the possibility of a trade war is a mitigating factor in the Fed’s economic analysis. Otherwise, Fed officials are looking at the unemployment rate falling to pre-1970s levels that preceded the inflationary 1970s. That’s a cause for concern for them, especially with fiscal policy expanding late in the cycle. We are now close to four rate hikes for 2018.

Meanwhile expect other central banks to start to remove policy accommodation as well. The Bank of Japan and the ECB, in particular, are expected to begin tightening next. Peak liquidity is now in the rear view mirror.

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