The March employment report came in pretty much in line with expectations. Nonfarm payrolls gained by 192k, and January and February were both revised higher. If you can discern any meaningful change in the underlying pace of economic activity from the nonfarm payrolls numbers, you have sharper eyes than me:
You could almost draw that twelve month trend with a ruler. The unemployment rate moved sideways:
In the past, sharp declines in the unemployment rate have been followed by periods of relative stability. I suspect we are currently in one such period.
The internals of the household report were generally positive. The labor force rose by 503k, pushing the participation rate up by 0.2 percentage points. And the labor market appeared to absorb those new participants nicely, with employment rise by 476k while the ranks of unemployed grew by just 27k. Measures of underemployment remain consistent with recent trends:
As might be expected if there remains plenty of slack in labor markets, wage growth remained largely unchanged:
I would say that on average, this report fits nicely with the view outlined by Federal Reserve Chair Janet Yellen earlier this week. The labor market continues to improve at a moderate pace, a pace that remains insufficient to rapidly alleviate the issues of underemployment and low wage growth. Indeed, combined with the readings on inflation:
I think the real policy question should be why is the Fed engaged in reducing policy accommodation in the first place? If Yellen is as concerned about the plight of labor as she purports to be, and if she and her colleagues are as committed to the 2% inflation target as they purport to be, then it seems like there is a strong argument for slowing the pace of the taper and using a rules based approach to taket the risk of earlier-than-anticipated rate hikes off the table. In short, there seems to be a disconnect between the Fed’s rhetoric and the general policy direction. They seem to have lost interest in speeding the pace of the recovery.
Persistently low inflation, however, may push them into action. St. Louis Federal Reserve President James Bullard opened up the door to slowing the taper if inflation does not prove to be bottoming. ViaBloomberg:
“I still think it is important to defend the inflation target from the low side,” Bullard, who doesn’t vote on policy this year, said today in a Bloomberg Radio interview with Kathleen Hays and Vonnie Quinn in St. Louis. “If inflation takes another step down, that will put heavy pressure” on policy makers “to take further action.”
That said, take this in context of a Fed that fundamentally wants out of the asset purchase business. Moreover, this is not Bullard’s baseline forecast. Via Reuters:
“Mine is in the first quarter of 2015, as far as liftoff for the funds rate,” St. Louis Federal Reserve Bank President James Bullard told Reuters Insider television, when asked for his view on when the U.S. central bank should make its first rate hike since 2006.
“You have to keep in mind I tend to be a more optimistic member of the committee,” he said. “I have a probably, a somewhat stronger forecast and a view about policy that suggests that maybe we should get up a bit faster than what some of the other members have.”
This labor report, however, is not exactly consistent with such a view, but that is also still a year away. In contrast San Franscisco President John Williams reiterated his view, which is much more consistent with the general consensus. Via Reuters:
“Given the economic outlook, and given also my view that we need accommodative policy relative to historical norms, we need to have relatively low levels of interest rates for quite some time,” San Francisco Federal Reserve Bank President John Williams told Reuters. “My own view is it makes sense to start raising rates in the second half of 2015.”
But the pace of rate increases, in Williams’ view, should be extremely slow, with rates ending 2016 well below the historical norm of 4 percent, “with the first digit being a ‘2,’” he said.
Of course, the second half of 2015 is a fairly big window, and I suspect that any conditions that draw the first rate hike to the front end of that forecast, and certainly to Bullard’s forecast, will be followed by a more rapid pace of tightening than currently anticipated. But that again is a matter for the data to decide. That and financial stability concerns; such concerns seem to be having a bigger impact on policy than officials like to admit.
Bottom Line: The doves win this round. One wonders, however, why, if they hold such a strong hand, they have been unable or unwilling to stop the systematic reduction in accommodation that began with the tapering talk of last year?
This piece is cross-posted from Tim Duy’s Fed Watch with permission.