Fed: The NFP Signal

Published on September 3, 2015

A quick note to preview tomorrow’s much anticipated Non-Farm Payroll and how it might influence the Federal Open Market Committee’s thinking at its upcoming September 16-17 meeting. The short version is not by much, tomorrow is far more all about how the market and media react to the print, not the Fed.

*** The NFP headlines jobs creation and unemployment rate will not really move the policy needle in either direction for the FOMC’s September outlook. Staff are mostly looking through data noise for signals the pace of jobs creation is deviating from the central tendency projections and for evidence of further declines in slack in the participation rate or early signs of wage growth in the hours worked data. ***

*** The more important NFP effect lies in the market’s reaction: if the market proves resilient in how it reprices to a healthy NFP print, it would be one less hurdle to a September first rate hike, in that it lessens the risks of excessive volatility. If a jobs print under 200,000 triggers an excessively dovish market response, while it would mean little to the Fed, it could complicate the FOMC’s September risk/reward calculations. ***

Fischer’s Messaging Correction

As we wrote earlier this week (SGH 8/31/15, “Fed: Jackson Hole Postscript), Fed Vice Chair Stanley Fischer last Friday in effect set up this week and the NFP as a reaction function exercise of sorts for the fixed income and equity markets.

The FOMC does expect market volatility to surround a first rate hike and is determined not to let market dislocations impair its timing. It will, however, as any central bank would, be very reluctant to undertake a first rate hike amid excess volatility. And that is especially on the first rate hike after seven years at the Zero Lower Bound.

It is our sense that one of the reasons Vice Chair Stanley Fischer pre-empted his own scheduled speech at Jackson Hole last week by giving an interview to CNBC Friday morning was to maximize its news exposure compared to the Saturday speech, whose impact on market pricing and expectations could have been relatively muted in a weekend news cycle.

By previewing his speech on Friday morning in the live TV interview, his more hawkish correction to the too dovish “less compelling” messaging by New York Fed President Bill Dudley could get priced back into market expectations before the weekend and thus better frame expectations this week and in the run up to Friday’s NFP report.

Fischer even pointed to the NFP number in his prepared speech on Saturday, noting its gains had averaged 235,000 over the previous three months. ┬áHe was, in effect, signaling that anything near that average would be keeping the path of job creation in line with the FOMC needing only to see “some” further improvement in job creation that would bolster their confidence inflation would be moving back to its mandate-consistent levels, however slowly.

Fischer in fact affirmed that confidence in the transitory nature of the factors repressing the expected rise in core inflation in his Saturday speech.

The Fed’s NFP expectations

For the Fed, the jobs number would have to veer wildly off the scales, nearer 100,000 on the downside or 300,000 on the upside, for it to get their attention enough to influence the debate over the outlook at the September meeting.

Our sense is that the most of the Fed staff forecasts are working on an assumption of an August employment print that is in line with the current pace of job creation, with the headline unemployment rate moving steadily lower towards 5%. And even if the August NFP is modestly lower than projections, it is almost certain to be revised and invariably, revised upward.

The Fed staff have been expecting the headline unemployment rate to run somewhat sideways through this year, but the September unemployment projections for year-end may get tweaked down a touch from their June 5.2%-5.3% central tendency forecast.

Fed staff are probably going to be more interested in discerning any signal from the noise in the Average Hourly Earnings and the Labor Participation Rate. But here again, a better looking AHE is a “nice to have” but not an essential to a first rate move, be it in September or later this year, since the Fed is pretty much resigned to little movement in the way of higher wages until next year.

But there nevertheless should be pockets of higher wages starting to show up here and there where skills are most in demand, as in fact was among the anecdotal reporting across many of the Districts in yesterday’s Beige Book report.

It is not much to go on, but it does provide at least some confidence in the assumptions that the unemployment rate is approaching its longer run level, with more broadly-base wage growth hopefully beginning to show up in the data more clearly sometime next year.

At the same time, despite its secular demographic downward trend, there should also be enough of a cyclical factor in labor participation for its measured rate to at least continue to stabilize if not modestly rise. That would indicate more discouraged or long term unemployed workers are being drawn back into the workforce as the labor market tightens, especially in those sectors of the economy where specialized skills are in demand and companies are willing to pay higher wages for skilled labor.

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