Fed: The NFP and Powell Remarks

Published on October 5, 2018

Two points to make in the wake of this morning’s Non-Farm payroll print:

First, the NFP will be taken by Federal Reserve officials as further confirmation of a strong economy showing no signs of slowing and a still tightening labor market that should soon lead to faster wage growth. In other words, the NFP is an affirmation of the continued gradual pace in rate hikes mapped out by Fed Chairman Jerome Powell and in the wave of similar remarks by so many other Federal Open Market Committee in recent days, reflecting an unusually firm Committee consensus.

The drop in the headline unemployment rate to 3.7% is impressive, and even if the job creation figure was only 134,000, the big upward revisions mean the month’s job gains still translates into a very healthy 208,000 average a month over the first nine months of this year compared to last year’s 182k average — and that in an economy that is supposed to be running out of workers.

And even though there was no evidence of wage growth over the previous month in the slight slip to 2.8% average hourly earnings, everything else in the mix of employment numbers points to rising wages going into the turn of the year, especially when retail may be scrambling to find workers for the holiday season.

Second, for the Powell-led Fed, higher wage growth in itself will not cause anxieties over inflation, and that helps to put into context Powell’s remarks the other day during his moderated discussion with Judy Woodruff that drew so much reaction in the markets.

We do not think his remarks were meant as a hardening per se of a hawkish messaging on the Fed’s already presumed base rate path. He was instead delivering pretty much the same message but speaking to a more lay audience; Powell in fact has made a point of not only speaking in plain English but also reaching to a wider public than the markets or any particular tweeters.

It was however somewhat odd for Powell to refer again to neutral as a reference point to the rate path after playing its importance down, and especially only days after New York Fed President John Williams did his awkward volte face on the centrality of neutral estimates to policy.

To be fair, the estimates of neutral will remain at the heart of the staff preparations for FOMC meetings, but it is likely to decline in the policy messaging. Nevertheless some could be forgiven for being a little confused about what exactly the Fed wants its audience to take away from the mixed messaging about neutral level of rates of the last week or so. You live, you learn.

If the market took his remarks and the data today as reasons to push yields up — so much for the fears of inverting the curve — and the pricing for rate hikes closer to the Fed’s base case rate path as per the dot plot, all the better. And for many traders that have been looking for the Fed to halt, or even reverse, its gradual rate hike path, penciled already to nudge above “neutral” if data continues to conform, that adjustment may well still have some more room to run.

A December hike is about as certain as possible under the current outlook, and while the risks going into next year look to be tilted to the upside that all but ensures 2019 is equally certain to see further rate hikes, we would caution the actual rate decisions, and thus the pace and ultimate number of hikes, will be taken on a meeting to meeting basis.

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