Some times on target is good enough, and this morning was one of those moments.
After all the breathless anticipation and previous wide of the mark prints, this morning’s Non-Farm Payroll numbers came in smack on expectations: 215,000 in net new jobs created in July, some upward revisions to prior months, and a steady 5.3% headline unemployment rate; even the breakdowns were right on expectations with a stable labor participation rate at 62.6%, and another steady gain in average hourly earnings, rounded up to a slightly higher 2.1% gain.
*** Today’s NFP will have provided the Federal Open Market Committee with further evidence of diminishing labor market slack and the “some” further improvement it signaled in its July statement that we think still solidly points to a first rate hike at the FOMC’s September 16-17 meeting (see SGH 3/18/15, “Fed: September and a Shallow Path”). ***
*** We suspect that rather than the real economy data points, the issue looming larger for the FOMC from here to September will now be how to frame their “data-dependent” messaging if needed to better manage market expectations to minimize the risk of dislocation surrounding a first rate hike. ***
Real Economy is “There”
It would be odd, just plain wrong, to think a NFP print right on expectations doesn’t move the policy needle. The FOMC did not and does not need to see a rising monthly job creation, only a continuation of steady job gains that will soon bring the labor market near or at its assumed longer run levels.
Indeed, the real economy is essentially “there,” showing the steady, accumulative gains needed to ensure the approach to full employment, and an economy that “can not only tolerate but need higher rates,” as Chair Janet Yellen so tellingly put it in her Humphrey-Hawkins testimony a few weeks ago.
Equally important, while persistently low inflation and the more uncertain growth and price outlook abroad will remain a concern, the FOMC does not need to see clear evidence of wage growth or even inflation moving higher before starting policy normalization: as we have previously noted and as various Fed officials including Chair Yellen have been stressing for some time, “reasonable confidence” in the forecast for inflation rising to mandate-consistent levels comes in the equilibrium-based assumptions that a shrinking output gap and the steady decline in labor market slack will be enough in due course to push inflation higher.
In other words, higher inflation, and hopefully stronger wage growth, will follow, not lead the start to a “sooner,” and gradual, rate tightening that provides maximum policy flexibility to avoid the need to raise rates more rapidly (see SGH 5/12/15, “Fed: A Hawkish Lift-off, Dovish Trajectory”).
A Messaging Dilemma
Probably the biggest dilemma the Fed will be facing in the coming weeks will not be doubts over what the data are indicating about the recovery, but how much further they may need to signal on their likely policy intentions if the good-looking data is not enough to move the markets along.
After all, it is not just policy that needs to be “normalized” in a return to rates-based policy to tighten monetary conditions, but the market needs a dose of normalization as well, with pricing weaned off the Fed’s heavy-handed steers through the long years at the Zero Lower Bound.
Since March, when it abandoned its formal forward policy guidance of the statement, the FOMC has tried to steer the market pricing away from Fedspeak to the data, with limited success. While market pricing has been steadily moving, at least at the front end, towards the recognition of a looming start to policy normalization, it may still need a modest nudge or two in that direction.
Against that backdrop, we think the interview given to the Wall Street Journal earlier this week by Atlanta Fed President Dennis Lockhart, who has a well-deserved reputation as a bellwether to the Committee consensus, went a long way towards reinforcing just that sort of framing to how the FOMC majority will be interpreting the data from here.
For the most part, the market will nevertheless be pretty much left on its own to re-price as the key data points come in through the rest of the month – the mid-month inflation prints, retail and consumer confidence numbers in particular come to mind. Fed-speak will, for one, be a bit thin through the rest of the month, in part due to August vacation schedules, but also because there remains that strong desire and need to see more real price discovery in the market in the run up to any rate hike.
But just in case needed, the two and half days this coming August 27-29 at the Federal Reserve bank of Kansas City’s conference at Jackson Hole will provide an ideal platform for any fine tuning to Fed messaging to a consensus, as we have been saying for some time now, that is nearly there for the September long-sought start to policy normalization.