The most immediate reaction among most Federal Reserve officials to this morning’s Nonfarm Payroll numbers was probably a shrug and the usual “it is only one number” response. But we suspect a strongly felt second reaction this morning will be that the case for a second rate hike is fading even further from the near horizon.
*** For most of the FOMC, which as we noted earlier this week was already turning a little more agnostic about a June move (SGH 5/4/16, “Fed: Burden of Proof”), this morning’s NFP breakdown will only further add to a caution about rates policy. That is especially the case when there is precious little time left to shift the extremely low probabilities being priced in by the market for a June move. ***
That long, gradual process of policy normalization, in other words, looks to have gotten a little longer, and a lot more gradual.
A Defense of Policy Normalization
A robust defense of the policy normalization strategy, or an aggressive case that despite the apparent softness in growth or slowing job growth that higher inflation is still in line with the forecast, could still lift now rock bottom expectations for a June rate move.
And in fact, the more hawkishly inclined Committee members might see an emerging trend-line in today’s slight dip in the labor participation rate and the modest uptick in the average hourly earnings: a sooner than expected tightening in the labor markets on top of the dollar and oil effects dropping out of the data through this year could flag just a short step to the first stirrings of that to-date elusive inflation.
What’s more, the Fed has already been expecting the pace of job creation to slow, so the fall off to 160,000 new jobs in April is hardly much of a surprise. The breakeven is for the most part seen well south of there, at around 85,000 to maybe 120,000 a month, so the labor market is still tightening.
But it is going to be hard to see how the remaining data this month — be it retail sales, the consumer confidence surveys, or CPI breakdowns — can provide enough clarity or turn so robustly that the Fed’s presumed “data dependent” policy path can keep a second rate hike in June on the table.
That is especially the case given concerns over just how pervasive the first quarter weakness may have been this time around as opposed to in previous years, and with it just how strong a second quarter rebound might be.
And that leaves few data points and little time for the Fed to shift market expectations in the run up to the June 14-15 FOMC meeting.
All that only underscores the growing problems in the Fed’s communications: every time Committee members insist every meeting is “live” but there is no rate move, it undermines overall credibility; and with every quarterly Summary of Economic Projections and rate dot plot being marked down — as seems likely in June once again — it reinforces the market’s ratcheting down in the rate hike pricing and deepens its skepticism on the Fed’s policy path.
If truth be told, there remains no small degree of lingering communications confusion that is making it very hard for a clear reaction function to help set market expectations. That is especially so when the Chair speaks so rarely to continually press the central bank’s base case policy path.