Fed: What’s Not to Like in the NFP?

Published on March 4, 2016

There is little for the Federal Reserve not to like in this morning’s stellar Non-Farm Payrolls numbers: a continuing surge in job creation, with 242,000 jobs added — even the U-6 underemployment rate fell to 9.7% vs prior 9.9% — and an upward revision of another 30,000 added to December.

And despite the pundit tizzy over the dip in the Average Hourly Earnings and Weekly Hours Worked numbers, the Fed is more than likely to look past both.

*** We still believe the Federal Open Market Committee is very likely to pass on a rate hike at its March 15-16 meeting. But we suspect where the NFP print today will enter into the policy discussions will be in helping make the case that, set against the backdrop of the resilient economic data of recent weeks, a March pause will help put a floor under inflation expectations. That is very unlikely to put an April rate hike on the table, but assuming a confirmation in the data of a tightening labor market over the coming months, a June rate hike will firmly be the FOMC’s base case assumption (see SGH 3/2/16, “Fed: A Tactical Pause”). ***

A Rising LPR

The biggest takeaway for the Fed is probably the unexpectedly decent repeat rise in the labor participation rate to 62.9% from 62.7% and the low of 62.4% in September last year. That translates into something like a half million new entrants returning to the labor force, almost right on cue in the Fed’s modeled projections of tightening labor market around its outer edges as the headline unemployment drops below the 5% mark for most estimated as its longer run levels.

The overall NFP breakdown should also chip away at the excessive market resignation to a looming recession and may even lend a hand to the Fed’s base case for a resilient real growth this year that will continue to tighten the labor markets. That may even bring a steepening Phillips Curve back to a more respectable standing in forecasting assumptions.

The only potential blemish on today’s employment print was obviously the -0.1% dip in earnings growth. But last month’s spike to a 2.5% annualized pace in the AHE was already more or less discounted by the Fed as highly unlikely to be sustained, and probably a calendar measurement issue.

The “drop” back down to an annualized 2.2% growth in wages, then, will hardly be seen as a major offset to the otherwise healthy-looking employment numbers. Wage growth is, for now, seen as likely to move more sideways than up in the coming months, but to build later in the year, especially in the second half.

If instead, wage growth were to spike up next month, coupled to stronger data across the economy, it might lead the more hawkish FOMC members to press the case for an April hike. But we think such a move to be highly unlikely. Instead, stronger than expected near-term data could boost the arguments for a steeper trajectory of the assumed appropriate rate path down the road

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