Everything in this morning’s Nonfarm Payroll numbers — yes, we know, one number a trend does not make — and for the majority of the Federal Open Market Committee every aspect of the breakdown in the numbers was right on the mark in neatly confirming the base case around which the central tendency forecast is built and with it, a lift-off in rates in that June to September window that we have been expecting, and that has been telegraphed by various Fed officials.
*** The main NFP takeaway for the Fed is the boost it gives to their confidence in the central tendency forecasts. In turn, it does strengthen the FOMC’s working assumption for a June rates lift-off (SGH 12/11/15, “Fed: The Case for June”), but keep in mind that doubts over the labor market were never the driving reason to what we equally sensed was slippage towards the latter September end of the window, namely, to wait for the oil-fueled disinflationary pressures to wash through the core inflation numbers (SGH 1/16/15, “Fed: On Timing and Pace”). A prudent caution to make sure inflation adheres to the forecast as neatly as the job numbers seems to be doing will loom large in the FOMC consensus. ***
*** But if there is one thing more certain, it is that the odds for a rates lift-off later than September just dropped off the table. In the unfolding divergence between the Fed’s projections and the market’s uber dovish pricing, the data just swung to the Fed. That said, regardless of today’s numbers, if it is any consolation, we do still think there will be some downward movement in the upcoming March meeting Summary of Economic Projection “blue dot rate plot” with a lower central cluster of projected year-end fed funds rate, nudging a bit closer to 1% than the December 1.125% median. ***
A March Communications Challenge
The numbers are all well known, but just to summarize the best bits to savor them when it is so bitterly cold out: net new job gains of 257,000 in January, coupled to 147,000 worth of revisions to the previous two months translated into a very handsome looking 336,000 average job gains over the last three months; even the nudge back up to a 5.7% from 5.6% in the headline unemployment rate fit the Fed’s expectations of a slower decline in the headline unemployment as more are pulled back into the labor force, and indeed, the labor participation rate edged up a notch to 62.9% from 62.7% and; the closely watched average hourly earnings reversed the outlier decline of December with an impressive 0.5% pop for a healthy though still lower than desirable 2.2% annual average.
So there is very little, if anything, not to like in this morning’s numbers. But with all good things, it does bring some complications, most notably on the communications front.
Namely, the FOMC will have to figure out what to do with the “patience” guidance that Chair Janet Yellen hardened somewhat to meaning no hikes for the next two meetings, and reinforced by its retention in last week’s no presser January meeting statement. And in a media interview yesterday, retiring Fed President Charles Plosser drove just that point home on what a pain the explicit guidance can be — he has always disliked explicit time-contingent guidance — but it shouldn’t be as bad as all that.
For our two cents — and it is early days as a word of caution — we suspect the majority of the Committee may favor just taking the language out in March simply to avoid being too boxed in again by guidance language, even if a firm consensus to hike in June is still lacking. At minimum, if it does remain, the Committee is more likely than not to caveat it so thoroughly in the statement language that it will make it that much easier for Chair Yellen in the meeting presser to put her emphasis on what will be the main takeaway from March, regardless of the fate of the “patience” guidance: that the long awaited first step to policy normalization is indeed nearing, and that June remains a very possible option but not a certainty.
An Eye on the Minutes, not HHT
There will be high expectations going into Chair Yellen’s upcoming Humphrey Hawkins testimony for clues to the March meeting debate and potential outcomes. The date has still to be set, however, which is a bit unusual into the second week of February, but we would caution against too much for the market to take away from the testimony, especially as we strongly suspect the focus of Congress will be elsewhere (see SGH 2/5/15, “Fed: A Rising “Audit” Risk”).
In any case, there will be no need to wait that long for clues to what lies ahead, in that the January meeting Minutes will be released on February 18. As the testimony is a reflection of the Committee consensus, we will be reading closely to see where the majority of the Committee leans on the balance of risks in the persistence of low inflation and the issues around financial stability, or what they do with the annual Statement of Longer Run Strategy and Monetary Policy, for the best guides to the most likely consensus that comes together going into the mid-March meeting.