US Outlook Report: It’s All About the Labor Market
With the Federal Open Market Committee meeting next week and releasing its latest forecasts on the economy and Fed funds rate, markets will be probing for signs that the Fed may move up its timetable for the first interest rate hike. The headline unemployment rate has dropped faster than many FOMC members expected this year, suggesting the Fed might be closer to its goal of full-employment and should be considering moving interest rates off the lower-bound about now. Last December, the FOMC central tendency forecast for the unemployment rate for the fourth quarter of 2014 was between 6.3 and 6.6 percent. In August, the unemployment rate was already well below that range at 6.1 percent.
Two things to look for in next week’s statement from the Fed. Will the Fed remove its “considerable time” language on holding the Fed funds rate in its current range? Or change the characterization of the labor market from “significant” underutilization of labor resources, both of which could be a signal to the markets that the Fed is getting closer to raising short-term interest rates. Indeed, the 10-Year Treasury yield has moved up about 20 basis points over the last two weeks, a nod to rising expectations of a rate hike in the not-too-distant future. Yet, there are many reasons I remain skeptical that the September FOMC statement will change much, if at all.
The drop in the unemployment rate in August to 6.1 percent was due to a lack of labor force growth and not a burst of new job creation. The household survey of employment, the survey from which the unemployment rate is calculated, has faltered over the last two months.
Moreover, initial jobless claims reversed course over the past month, and are beginning to rise again. Last week’s figure wasn’t much different from the 2014 average.
Many of Janet Yellen’s dashboard indicators of the labor market reveal a mixed picture of labor market progress.
Despite the frustration of Philadelphia Fed President Plosser (who dissented at the last meeting) toward the time dependency of the Fed funds target rate language, no one can deny it has been effective at holding down short-term interest rate expectations. Fed funds futures rate hike expectations over the next two years remain well below the median forecast from the Fed’s June dot-plot from the Summary of Economic Projections (SEP).
In short, a change in language here might work against the Fed’s objectives to strengthen labor market conditions, especially if it leads to higher and more volatile, long-term interest rates today. Last week, mortgage applications swooned as mortgage rates ticked up just fractionally, demonstrating the sensitivity of demand to higher rates.
To find out more, check out this week’s US Outlook Report for September 12, 2014.
Tags: economy