Fed: An Awkward Number

Published on September 2, 2016

Key Takeaway:


The NFP this morning still leaves the FOMC leaning to a September rate hike, but the Fed has a major communications challenge ahead to win over a still deeply skeptical fixed income market.

September 2, 2016

Well, the first thing to say about this morning’s Non-Farm Payroll numbers is just how positively irritating it was in failing to provide further clarity one way or another on the probabilities and merits of a Federal Reserve rate hike at this September 20-21 meeting.

For the Fed’s messaging, it was downright awkward.

*** On balance, the odds on a September rate hike are lower, but we suspect only a tad lower, and we believe a Federal Open Market Committee decision to raise rates as soon as the September meeting is still the base case. But it is fair to say the Fed now has a seriously heavy messaging lift in the ten days remaining before the pre-meeting blackout if they truly want to nudge market pricing probabilities significantly higher to where they would feel more comfortable in moving on rates. ***

An NFP in Line with the Forecast

The 151,000 headline jobs number — which is invariably going to be revised and probably higher — is in fact firmly in line the Fed’s baseline forecast for a steadily tightening labor market while a 232,000 rolling three month average jobs growth is nothing short of impressive in the seventh year of the expansion since the crisis, however tepid it may seem.

That by most accounts would warrant a second rate hike as soon as the September meeting, especially in light of the FOMC majority consensus for a rate move we think has been in place since early summer. That mid-year move was delayed but not derailed by the elevated risks in the disappointing May NFP and the Brexit vote, all of which has since faded while the underlying domestic data has still been quite favorable.

And a September move, as we noted earlier, would fit neatly within a “dovish hike” framing the FOMC would like to achieve with the September rate dot plot providing an ideal backdrop in displaying just how very gradual and shallow the ascent in rates is likely to be across the policy horizon.

But a Messaging Optics Problem

But Fed officials have created something of a major optics problem in their recent messaging, especially during the Jackson Hole conference. As we noted in a previous report (SGH 8/29/16, “Fed: Jackson Hole Postscript”) Fed officials were surprisingly disciplined in what was clearly hawkish messaging that was further stamped in the absence of the usual dovish voices this time in the run up to the September meeting.

More specifically, while the Fed may resist the interpretation, the hawkish messaging included a clear steer in the market’s attention to the NFP number as an out-sized guide to probabilities on September.

The risk now is that the Fed officials may have, more by default than design, created another bout of messaging confusion in the run-up to their September meeting, much as what happened with the May NFP print that undercut the messaging march to a rate hike at the FOMC June meeting.

So it would be entirely fair to say Fed officials will now have a major, heavy messaging lift in the ten days remaining before the pre-meeting blackout if they truly want to nudge market pricing probabilities significantly higher to where they would feel more comfortable in moving on rates at their September meeting.

Indeed, despite the profoundly skeptical fixed income market on the odds of a near rate hike, we still lean to the odds for a September rate move. But we would be tempted to think it would only take one more downside data surprise or market wobble to tip the balance of the Committee’s cost/benefit assessment on the timing to a rate move back from September to a more cautious December decision.

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