July Jobs Report and the Fed

by: Tim Duy

The jobs report was somewhat better than expectations. Admittedly, this isn't saying much. But it was "good" enough to give the Fed pause before rushing into a fresh round of easing.

The headline NFP gain of 117,000 jobs was a combination of a not-terrible 154,00 gain in the private sector and a 37,000 loss on the public side of the ledger. Overall, simply a sideways movement. From the perspective of policymakers, however, the numbers will suggest that recession fears are overblown. And the 10 cent gain in hourly wages will suggest to some FOMC members that a renewal of deflation fears are also equally overblown.

It is true that, as Calculated Risk notes, the survey period was before agents turned cautious as the debt farce deepened. But, then again, the Fed would simply argue they need to see how much of that caution is quickly reversed.

Now, they could turn their attention the the household survey, and note that both labor force participation rates and the employment to population ration continue to decline. But they could attribute these effects to largely structural causes, and as such beyond their purview. This too would also argue against any significant change in policy.

The implied inflation expectations from the TIPS market is 193bp and 225bp at the 5 and 10 year horizons, respectively. Still well above last summer's lows. The Fed has repeatedly argued they can't do anything about growth, but can fight deflation. But this doesn't appear to be a strong deflationary signal. This too argues against significantly policy shifts.

Financial market chaos argues for a shift in policy, but traditionally the Fed has resisted until the impact on actual economic activity becomes more evident. Again, an argument against looser policy.

On net, and with the benefit of the labor report in our back pocket, I think Neil Irwin at the Washington Post is most likely correct:

The Fed is holding its regular meeting on monetary policy next week, and leaders of the central bank will surely discuss the weakening outlook, whether they should do anything in response and what such a response might consist of. Their public statement following the meeting will likely reflect the worsening outlook for the economy, but they appear inclined not to make any policy changes until more evidence has become available and there has been more time to weigh it.

They will offer the possibility of further action, but none will be forthcoming next week. Now, all that said, I think the Fed should get ahead of this one - failure to do so has not yielded positive results in the past. But what the Fed should do and will do are two different things.