Fed: In the Wake of the NFP

Published on September 4, 2015

Four things to take away from this morning’s Non-Farm Payroll number and its most likely impact on the Federal Open Market Committee’s policy decision at its forthcoming September 16-17 meeting: 

First, there is nothing in the NFP headlines or its breakdowns to argue against a near-term rate hike: 

The initial headline 173,000 jobs number rate caused a (very) brief rally before the rest of the breakdowns hit the wires causing a sharp reversal, and for good reason: August is almost certain to be revised up, as both June and July were by healthy numbers; the headline unemployment rate dropped to 5.1%, or already falling to the midpoint in the FOMC’s assumed 5.0%-5.2% longer run rate, while the broader measure of unemployment also modestly declined, and; average hourly earnings and average work week were both up and the labor participation rate continued to stabilize against a backdrop of the larger demographic downward trend.

But as we wrote yesterday (SGH 9/3/15, “Fed: The NFP Signal”) the NFP was unlikely to move the policy needle much in either direction for the Fed, and the more important takeaway for the Fed was likely to be how the market pricing and pundit commentary would go in its wake. More to the point, the pricing probabilities for a September rate hike have edged higher, while overall volatility doesn’t seem to be getting so out of control it threatens major dislocations. It is early days to say the least on that, however, and the meeting is still nearly two weeks away, a life time in market pricing.

Second, the “lean” among a clear Committee majority remains towards raising rates in September, though a lean is still not a decision:

That (hoped for) absence of market dislocation also adds to the “lean” within the Committee towards a first rate hike in September. The lean is important and telling, in that so much of the market skepticism the FOMC will raise rates in September — or ever – is a widespread belief the Fed, and Chair Janet Yellen in particular, is always looking for a reason not to raise rates.

Nothing could be further from the reality in the long and laborious process of how a Committee consensus is shaped, and that once coming together, how hard it is to dislodge shy of a clear downside shock. This is an FOMC that has been looking to September as the most likely start to its much-sought policy normalization since at least last March, the Chair included.

That said– how the world would be so much better without such a qualifier –while we do think the Committee majority lean is towards a rate increase, it is a still only lean going into a meeting, not a pre-ordained decision. It is a fine line in the distinction, but it is an important one, for the actual, crucial decision to go or to stay on rates will not be made until that Thursday afternoon on September 17.

And third, that means that while market may still want a last “nudge”– in either direction — from the Fed on its September rate decision, it is unlikely to get it: 

Both the market (and the FOMC itself) would probably prefer a greater degree of certainty in the looming rate decision as the best means to minimize potential market dislocation. But on the eve of the pre-meeting blackout period, we doubt there just is a clear and clean enough consensus that would enable “a senior” Fed official, as the euphemism goes, to give that final nudge on more certainty.

Our sense, though, is that a market balanced with even odds on a rate hike and “stable volatility” would be good enough to clear pure market disruption considerations out of the rate decision. That would leave the rate decision to ride on the still very difficult read on whether the risks in the “Great Disruption” of August and slower global growth with all its darkening disinflationary impulses is going to be enough to displace the FOMC’s “reasonable confidence” on the US inflation outlook. As of last weekend, Vice Chair Stanley Fischer was strongly suggesting the consensus among the majority of the FOMC is that it does not.

So, should I stay or should I go? 

At the end of the day, for all the emphasis on date dependence, the contrasting forecasting scenarios, and handwringing over the global disinflationary pressures, the FOMC decision is most likely to be made in that tough assessment in weighing the costs in correcting a policy error versus the anticipated benefits of being right.

And it is still our sense, on balance, that the calculation is going to tip the FOMC towards a hike in target for federal funds to 25 to 50 basis point range thirteen days from now. But it is equally safe to also say it is going to be a very finely balanced decision.

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