Fed: From the NFP to Jackson Hole

Published on August 1, 2014

The continued job gains in this morning’s Nonfarm Payroll numbers are likely to be taken by a majority of the Federal Reserve officials as further evidence current policy is on the right track, and more to the point, that the relative flatness in the wage gain measures confirms the accommodative policy still has a way to run.

That should to some extent offset the impact of the Committee’s two most prominent voting hawks, Dallas Reserve Bank President Richard Fisher and Philadelphia President Charles Plosser, both building this morning on the modestly more hawkish tone to Wednesday’s FOMC statement.

*** We would stress we do believe a turn — a modest one, but a significant turn nonetheless — has come in the balance of the Fed’s thinking towards when to hike and how to execute the hike from whether to hike or how much “lower for longer” it needs to run (see SGH 7/24/14, “Fed: Calibrating the Guidance for Lift-off” and SGH 7/30/14, “Fed: An Option Just Exercised”). But we would add in the wake of this morning that it is still more likely than not to be a very calibrated movement, stretching across several more meetings before the timing to a rate hike is more explicitly messaged. ***

Time in the Sun for the Hawks

Fisher, a bit surprisingly since the informal post-meeting blackout is still in effect, briefly made his case on CNBC this morning that Wednesday’s statement “significantly” moved the timing to the rate lift-off forward, while Plosser in a more restrained manner in releasing a customary dissenter’s explanatory statement, underscored his adherence to a Taylor Rule on the assumed policy path in arguing the current “considerable time” phrasing of the forward guidance is out of whack with the gains in the pace of the recovery.

We would tend to watch Plosser closely, as he is likely to have support within the FOMC in making his case at the September meeting: the start to adjustments in the forward guidance needs to get underway to better reflect the progress in the recovery towards the Fed’s twin mandates on unemployment and inflation.

But there would be a danger in taking this too far in the market pricing, at least in the coming weeks, because we suspect upcoming remarks by other Fed officials will offer a more moderated tone to the messaging in also underscoring how much farther the recovery needs to go before the long sought escape velocity is firmly in place.  

On that note, the breakdown in this morning’s NFP came in almost right on cue, with a repeat of another month’s worth of 200,000 of net jobs growth, but importantly, the labor participation rate ticked up ever so slightly, edging the headline unemployment rate to 6.2%, and average hourly earnings remained on its tepid 2% annualized growth.

We would also add that yesterday’s jump in the quarterly Employment Cost Index by 0.7%, while handsome, is coming on the back of an unusually soft print in the first quarter, and on an annualized basis, is more or less likely to have been in line with the Fed’s central tendency projections.

Prelude to Jackson Hole

That, of course, neatly tees up the anticipation for Chair Yellen’s keynote speech expected on August 22 to open the Federal Reserve Bank of Kansas City’s conference in Jackson Hole on “Labor Market Dynamics.”

In it, we would expect the Fed Chair to lay out a case for monetary policy to continue to probe for the lower end of the longer run unemployment rate, or NAIRU, and to pave the way for a potential rise in wages, higher productivity and a return to rising longer run trend growth. With upward inflationary pressures more likely than not to be limited in the near term, trending more or less sideways rather than accelerating on an upward trajectory, the more costly policy mistake at this point would be a premature signal to a near-term hike.

But she may also frame the arguments by noting the progress in that policy path to date, offsetting any excessive dovish interpretation and takeaway to the speech.

So overall, we think the messaging it will be a carefully calibrated movement in the messaging of the Fed’s policy guidance over the next few months even as the movement towards the Exit is now in view.

One last note on that point, we would expect Fed officials to soon come forward with further details on the likely consensus in the run up to the September meeting on the mechanics of the Exit, in particular, the relative roles of the Interest on Reserves rate and the overnight reverse repurchase rate with the effective fed funds rate, and in particular to what extent the still confusing quarterly year-end fed funds “blue dot” rate projections will be framing the likely lift-off and trajectory of rates once the tightening is finally underway.

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