Fed: A Good Looking NFP

Published on February 3, 2017

The market may have whipsawed on this morning’s Nonfarm Payrolls print, but Federal Reserve officials will have responded to the jobs number with a satisfied smile.

** Today’s jobs data reinforces our low probabilities for a March rate hike, but it also supports the high likelihood of the third rate hike in the policy normalization process at the June Federal Open Market Committee meeting. As we have previously noted (SGH 1/19/17, “Fed: On the Near Policy Path”), this is an FOMC that is for now in a reactive rather than pre-emptive monetary policy stance. **

The headline jobs gain of 227,000 was by no means nothing to sneeze at and underscores a healthy economy with enough demand to meet or modestly exceed the projections for an average real growth of 2.1% this year.

But two numbers in the NFP mix in particular stand out for the Fed:

The first was the fairly dramatic surge in the Labor Participation Rate. For a big number that rarely moves by all that much, a 0.2% jump to 62.9% from 62.7% was nothing short of impressive. The second was the 2.5% rise in the Average Hourly Earnings.

Despite the market’s dismay with the latter’s lower than anticipated 2.7% print, it was more than enough to satisfy the Fed’s projections for a slow but steady climb in wage gains that should very gradually pick up through this year as the labor market continues to tighten.

It is the rise in the LPR, however, that is probably more valued by Fed officials. It will be taken as confirming what has long been Chair Janet Yellen’s bet that there are cyclically-driven unemployed workers — and untapped aggregate demand — still lurking amid what many had been arguing since the crisis is purely structural secular demographic decline in the labor force.

And, in turn, both those numbers will also be taken as a validation of the policy “probing” through the very gradual pace of rates normalization for where the true longer run unemployment level lies.

Most Fed officials, in turn, are now betting this last stage of the labor market healing will be evident in steadily rising wage growth. And however stretched and flattened the presumed Phillips Curve linkages between the labor market and inflation may be, this year should also see a steady rise in inflation towards mandate-consistent levels around 2% that will warrant the ongoing gradual removal of monetary accommodation.

As to how the Trump Administration’s mix of fiscal and tax policies alters that path and pace of rate normalization, that is something that just won’t come into view until the FOMC’s June meeting at the earliest.

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