There was nothing the Federal Reserve could possibly fret over in this morning’s Non-Farm Payroll: the pace of job creation last month was nearly three times the level the Federal Reserve needs to see in order to conclude the labor market is still tightening and, more importantly, the labor participation rate did even better than just stabilizing, ticking up a notch, while average hourly earnings continued to clock a steady increase at an annualized 2.6%.
A few takeaways:
** The handsome jobs print clearly keeps a Federal Open Market Committee rate hike on the table at its September 20-21 meeting, and more to the point, it further reinforces the high probabilities of a rate hike by year-end.
** The rate timing decision, assuming the data stays on track, is and has always has been a tactical one, in which the FOMC policy messaging and the behavior of the dollar will invariably be the critical factors.
** The FOMC is acutely sensitive to the policy divergence between the Fed’s policy normalization path of a gradual ascent in rates and the ongoing easing efforts by the rest of the world’s central banks. A too abrupt or sustained rise in the dollar could excessively tighten financial conditions and complicate the merits of the rate move.
** Those risks, in balancing purely upward domestic drivers to a rate move and downward global pressures puts a high value on the FOMC’s communications to smooth the way to a rate hike.
** That is why we think the evolution in the Fed’s thinking about policy normalization and a flattening, extended rate trajectory — and its messaging — is the important calculation in the near rate hike timing.
** Whether the rate move comes in September or December, it is highly likely to be framed as a “dovish hike” in which the increase in the range for the fed funds rate by 25 basis points will be set against a further lowering of the longer run neutral projections and a probably tick down in the rate projections for the outer years of the rate dot plots — which for the first time will include a glimpse of the rate projections for 2019.
** Thus the keynote speech by Chair Janet Yellen, and the thrust of the discussions on the sidelines at the Federal Reserve Bank of Kansas City conference in Jackson Hole on August 25-27 will be so important to establishing the sort of messaging that would allow for a smooth rate move as early as September.
** On balance, the odds still tip to December, but the decision whether to move in September or not is still nearly two months away, and if the data continues at its current pace, the question will be why not?
** One last point is a quick one: we often hear the US elections in November will tip the FOMC against a hike in September. But we would instead stress the US elections are just not a significant factor in the rate debate one way or another.
** Even if the FOMC gave a few minutes to weigh the elections factor, they are likely to conclude there are just as many arguments in favor of a September rate move to get it out of the way before November as there are for supposedly waiting until December, by which time there in fact could be more, not less, political uncertainty and pressures.