The minutes of the November FOMC meeting followed the path of recent Fed speakers. The Fed is still likely to raise rates in December:

Consistent with their judgment that a gradual approach to policy normalization remained appropriate, almost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon if incoming information on the labor market and inflation was in line with or stronger than their current expectations.

There will be some holdouts with in December:

However, a few participants, while viewing further gradual increases in the target range of the federal funds rate as likely to be appropriate, expressed uncertainty about the timing of such increases.

And some that believe the Fed has already done enough:

A couple of participants noted that the federal funds rate might currently be near its neutral level and that further increases in the federal funds rate could unduly slow the expansion of economic activity and put downward pressure on inflation and inflation expectations.

Overall, they set the stage for a change of language in the December statement:

Participants also commented on how the Committee’s communications in its postmeeting statement might need to be revised at coming meetings, particularly the language referring to the Committee’s expectations for “further gradual increases” in the target range for the federal funds rate. Many participants indicated that it might be appropriate at some upcoming meetings to begin to transition to statement language that placed greater emphasis on the evaluation of incoming data in assessing the economic and policy outlook; such a change would help to convey the Committee’s flexible approach in responding to changing economic circumstances.

The upshot is that with rates near their neutral level, future policy changes are increasingly data dependent. The economy is at an inflection point as this year’ fiscal-induced euphoria wanes. The magnitude of the slowdown will determine how many, if any, rate hikes we see next year.

Separately, on the data front, consumer spending remains alive and well:

By all accounts, the momentum seems to be holding as we enter the final weeks of the year. Which shouldn’t be a surprise. Confidence is high, unemployment low, gas prices down, and wages up. That dynamic keeps household spending powering forward for now.

From the same report, inflation remains quiet despite concerns the economy has surpassed full employment:

These low inflation numbers give the Fed room to pause when they are confident economic momentum has downshifted enough to end the downward pressure on unemployment. Be wary though of possible upside surprise to inflation numbers in the next few months year if we see a concentration of price hikes around the turn of the year (in a low inflation environment firms hike less frequently).

Speaking of unemployment, some economists are raising alarm bells over the recent rise in initial unemployment claims. This isn’t crazy; claims typically rise ahead of recessions. That said, the increase so far is fairly minimal, might be influenced by seasonal adjustment issues, and, as importantly to me but often overlooked, the breadth of rising claims also remains minimal:

We would see a bigger rise in the dispersion of claims across states if there was a significant worsening of the labor market. There was even a subtle rise in the dispersion of claims in 2015-16 in the aftermath of the oil price decline while claims moved sideways. See also the rising dispersion of claims ahead of the 2007 recession.

Speaking of the 2015-2016 oil induced trauma, I sense a fear that we are about to see a repeat of that episode now that oil prices have fallen. Such fears are perfectly understandable given that the US is now both a major producer and a consumer of oil products. For what it’s worth, however, the sector never recovered the jobs lost during that period:

Ditto for capital investment:

Given the lack of recovery, it seems unlikely that the magnitude of the previous downturn will be repeated.

Bottom Line: Fed remains likely to hike in December, but policy beyond that meeting is pretty much a blank slate. There is a lot of data to come between now and March, the most likely next opportunity for a rate hike. It could be soft enough to justify a pause as early as that meeting.

Federal Reserve Chairman Jerome Powell extended his colleague Vice Chairman Richard Clarida’s comments and emphasized the data dependent nature of monetary policy in 2019. It is a wait and see game at this point. The Fed might not hike in 2019. They might hike four times. It depends on what is left after the sugar high from fiscal stimulus fades.

Market participants zeroed in on Powell’s assessment of the current stance of policy. He did not say, as was initially reported, that rates were near neutral, but instead said that rates are near the bottom edge of the range of neutral estimates. Policy thus could be far from neutral if the upper estimates of neutral are correct.

Still, this was a pullback from Powell’s October remarks that policy rates are a “long way” from neutral, which implied considerable certainty about the appropriate level of rates at this stage in the business cycle. This alleviates concerns that Powell has a fixed notion of where rates are headed.

This was an important shift for Powell to walk back the October remarks. My sense is that Powell and others leaned too far into the “hike above neutral” story ahead of the data to support that call. This made it appear that policy was less data-dependent than in reality. Some softening of the data drove this home as well.

I do find it interesting that Powell & Co. remain tied to the current range of neutral estimates after New York Federal Reserve President John Williams tried to downplay the whole r-star story a couple of months ago. Williams left the impression that the r-star estimates weren’t all that important. But they are.

Prior to that move, we had a nice little story about how policy would become more data dependent as we moved closer to neutral. Now the messaging has moved back to that story. After the December hike, the Fed will be at the lower end of the neutral range, and policy will become increasingly data dependent. As Powell says:

We will be paying very close attention to what incoming economic and financial data are telling us.

Bottom Line: Where does this leave us? Waiting for more data. Assuming inflation remains under control, I think the Fed will pause when they see that economic momentum has faded sufficiently to stabilize the unemployment rate. More on that later.

Federal Reserve Vice Chairman Richard Clarida delivered a speech emphasizing the data dependent nature of Fed policy. There were signals on the path of policy, but the path is subject to the evolution of the economy. The Fed isn’t going to tell you exactly where rates are headed anymore. Welcome to the post-forward guidance world.

Clarida presents an optimistic description of the economy. In particular, he watches the inflation data:

The inflation data in the year to date for the price index for personal consumption expenditures (PCE) have been running at or close to our 2 percent objective, including on a core basis‑‑that is, excluding volatile food and energy prices. While my base case is for this pattern to continue, it is important to monitor measures of inflation expectations to confirm that households and businesses expect price stability to be maintained.

Survey and TIPS-based inflation expectations give him to reason for concern. Then he asks:

What might explain why inflation is running at or close to the Federal Reserve’s long-run objective of 2 percent, and not well above it, when growth is strong and the labor market robust?

The answer is faster potential growth due to productivity gains and labor force growth. He expects demographics to eventually catch up to labor force growth but remains optimistic that in the short run we can squeeze some more labor out of the prime-age group. Regarding productivity growth, he sees both structural and cyclical factors at play. Clarida see business investment as an important indicator of structural productivity growth and expresses what I would call disappointment with the third quarter investment numbers. Still:

One data point does not make a trend, but an improvement in business investment will be important if the pickup in productivity growth that we have seen in recent quarters is to be sustained.

One takeaway is that if we get ongoing above-trend growth in a low-investment economy, then we would expect the currently low inflation rates to tick higher.

Clarida presents a very nice description of the intersection of data dependence, monetary policy, and communications:

It is important to state up-front that data dependence is not, in and of itself, a monetary policy strategy. A monetary policy strategy must find a way to combine incoming data and a model of the economy with a healthy dose of judgment–and humility!–to formulate, and then communicate, a path for the policy rate most consistent with our policy objectives. In the case of the Fed, those objectives are assigned to us by the Congress, and they are to achieve maximum employment and price stability. Importantly, because households and firms must make long-term saving and investment decisions and because these decisions‑‑directly or indirectly‑‑depend on the expected future path for the policy rate, the central bank should find a way to communicate and explain how incoming data are or are not changing the expected path for the policy rate consistent with best meeting its objectives.⁴ Absent such communication, inefficient divergences between public expectations and central bank intentions for the policy rate path can emerge and persist in ways that are costly to the economy when reversed.

He further explains two different ways in which data might impact policy decisions. The first is by tracking the data relative to the forecast:

If, for example, incoming data in the months ahead were to reveal that inflation and inflation expectations are running higher than projected at present and in ways that are inconsistent with our 2 percent objective, then I would be receptive to increasing the policy rate by more than I currently expect will be necessary.

But data can impact policy in a second way by causing policy makers to update their estimates of key parameters, notably the natural rates of unemployment and interest. For example:

I would expect to revise my estimates of r* and u* as appropriate if incoming data on future inflation and unemployment diverge materially and persistently from my baseline projections today.

Which is a signal of what we can all suspect to coming: If inflation remains low with unemployment below the current estimates of the natural rate of unemployment, then he will lower his estimates of key parameters accordingly. Assuming a constant path of actual unemployment, the impact will be to revise down the expect rate path.

The immediate implications for policy:

This process of learning about r* and u* as new data arrive supports the case for gradual policy normalization, as it will allow the Fed to accumulate more information from the data about the ultimate destination for the policy rate and the unemployment rate at a time when inflation is close to our 2 percent objective.

Clarida still supports gradual policy normalization, edging up interest rates until the data tell him enough is enough. What does this mean? It could mean a lot of things depending on the evolution of the economy. But one example of a potential outcome is that if downward pressure on unemployment ended but inflation remains low, Clarida would not see a need to push rates into a restrictive zone.

There has been some attention to Clarida’s shift from “some further gradual adjustment” to “gradual policy normalization.” I think this debate distracts from what otherwise was a very nice speech outlining the data-dependence approach. That said, my interpretation of the shift away from “some” was yet another effort to roll back forward guidance. Clarida doesn’t want to leave the impression that policy is on a pre-set course. How many more hikes? Could be one. Could be six.

Bottom Line: The Fed is data dependent. Growth will almost certainly slow in 2019. If it looks like to slow sufficiently to halt the slide in the unemployment rate while inflation remains low, the Fed will slow the pace of rate hikes. If unemployment continues to slide while inflation remains low, then the gradual pace of rates will continue longer. If unemployment slides and inflation ticks up, the Fed will probably hike a little faster.

Sorry about the premature posting earlier today! Post now updated and completed.

Quickly commenting on some responses to my piece yesterday. First, from Steve Matthews at Bloomberg:

Interesting, I hear Fed folks talk all the time about payrolls (and unemployment rate and average hourly earnings) but it’s rare you hear anyone talk about ISM.

— Steve Matthews (@SteveMatthews12) November 26, 2018

That comment brought up a point that I did not make sufficiently clear. We don’t regularly hear Fed officials highlight a signal data point and say “if it hits this level, we will respond like this.” And we shouldn’t – it’s really about the constellation of the data. From my perspective, the ISM report often quickly reflects a shift in the underlying data, allowing me to create a shorthand version of what prompts changes in the Fed’s policy stance. A combination of data that usually does the trick is weak ISM, weak payrolls numbers, and low inflation.

One commenter derided me as out of touch with the times:

That’s so 90’s. Name a fed speaker who has mentioned ism in the last 15 years ?

— RideTheWave (@tenerife444) November 26, 2018

What can I say? I love classics (and I suspect that we are beyond the choppier data flow of the Great Recession era). I can’t even publish my Spotify playlists for fear of public ridicule. Seriously though, see above. I am not saying that Fed Chairman Jerome Powell would be foolish enough to publicly or privately hinge policy on a single variable, but under most conditions a shift of that variable coincides with shifts of economic activity that prompts the Fed to change course.

Finally, via email I received comments questioning the value of the ISM measure during the late 90s, a period of solid growth despite low ISM readings:

Note that I did not say that the ISM number was by itself a great recession indicator, only that is tended to correspond to changes in Fed policy. And this era was no exception. 1997 and 1998 were the time of the Asian Financial Crisis, LTCM, a yield curve inversion, and predictions of recession due to a fall in US exports. And the Fed’s response was to cut interest rates. Here is the ISM chart with timing of Fed policy easings:

Bottom Line: Market participant’s attitude about the path of rate policy have shifted dovishly in recent weeks. So far, the data flow does not support such a dovish shift. If those who foresee a significantly darker future are correct and December is truly the last rate hike, you will see the data soon turn. What would that turn look like? I suspect that, in a nutshell, it would entail a sharp drop in the ISM index, weak job growth, and sustained low inflation. If I saw those things happen, I would say that the odds of the Fed skipping a hike in the first quarter of 2019 are quite high. 

The last week of November brings with it heavy interest in the path of rate hikes for 2019. Following an extended period of turbulence on Wall Street, market participants question the Fed’s willingness to push ahead with expected rate hikes. For its part, the Fed really doesn’t know what is in store for 2019; the path of policy is data dependent. Strong data will push the Fed in the direction of their current rate forecasts; weak data will push the Fed in the opposite direction. I expect this will be the primary message Fed speakers deliver this week. That leaves me watching the data ever more intensely.

Given the mood on Wall Street I expect market participants will focus on any downside risks highlighted by central bankers. I would caution that this approach leaves one vulnerable to any positive data surprises over the next couple of weeks. Such upbeat data would tend to keep the Fed locked onto its existing rate path. The Fed will lean toward dovishness when they see a shift in economic activity that would signal an impending slowdown in job growth.

This of course raises the question of what would signal such a shift in growth. Always a tricky question, because the circumstances surrounding each policy shift differ. At the risk of boiling policy down to a single variable, I would say that the ISM manufacturing report has been a good early indicator of an impending shift in the tightening cycle toward a more dovish stance. More concretely, a drop in the ISM index confirms that any related weak job numbers are not just noise but indicative of a shift in the economy.

Here is the long view:

As a general rule, the Fed ends a rate hike cycle when the ISM composite index plunges toward 50. The important point here is that such instances general confirmed that associated slowdowns in job growth reflected shifting economic conditions, allowing the Fed to make an early decision on the path of rates prior to seeing multiple weak job reports.

I have been told by long-time market participants that the ISM report, previously known as the NAPM report, was called the NAPALM report on Wall Street because of its ability to signal explosive changes in the path of the economy. You can see why; it often gave the Fed room to make a significant policy shift.

That said, no two cycles are alike. The Fed occasionally does not respond to a precipitous plunge in the ISM index. Still, I expect that conditions are lining up such that they would respond dovishly this time around.

Stripping policy down to its core, during the rate hike portion of a business cycle, the Fed desires to slow down job growth to stabilize the unemployment rate .A challenge is that the job growth numbers are very volatile. Weak months are common during expansions. Consequently, a weak jobs number alone is not enough to end a rate hike cycle. But a weak jobs number combined with a weak ISM number is a combination that typically does the trick. You can see this in the 1994-95 and 1999-2000 cycles (vertical lines indicate timing of Fed rate hikes):

The 2004-06 cycle was a bit different. The ISM index fell to almost 50 in 2005, but the Fed stayed on track with rate hikes:

In 2005, the Fed was still fairly early in the rate hike cycle, sufficiently far from neutral rates that they weren’t concerned they had already made a policy error. Moreover, the job market remained strong and housing was still on an upswing. Finally, inflation numbers were perking up. Altogether then, the Fed felt comfortable maintaining the 25bp/meeting pace of rate hikes. Interestingly, in mid-2005 market participants were, like now, doubting the Fed’s resolve.

The current rate hike cycle began with an anomaly:

The Fed began a rate hike cycle with the ISM index in contraction! This turned out to be an ill-advised move – evidenced by the fact the Fed had to quickly shift gears and not hike rates for another year – that I don’t know it holds many lessons for now. The degree of financial disruption, the decline in oil, and the strength of the dollar were all much more substantial than now. And inflation was not a real concern. The decision to hike rates looked more about the Fed feeling compelled to follow through with a promised rate hike than a careful analysis of the economy.

Which brings us to the present. Realistically, now that the Fed has eight rate hikes under its belt, Powell & Co. are closer to the end of the cycle than the beginning. They know this, just as they know they are moving into the lower range of estimates of the neutral rate. And, at least for now, inflation concerns look minimal. Combined then there is nothing stopping the Fed from pausing if the economy sours.

Softening though is not souring. Souring would be a decisive shift in the economy that halves job growth. A substantial drop in the ISM numbers to something close to the 50 mark plus a couple of weak job reports would do the trick.My guess is that is what we should be looking for in order for the Fed to feel the time to pause is at hand. If the economy is softening dramatically, that’s the kind of shift that would be imaginable between now and the March meeting and which could then make December the last hike, at least for a while.

Now, I repeat that it is risky to try to make policy about just one or two variables; an entire constellation of variables is always at play. Ultimately, the interpretation is that when that constellation of variables changes enough to signal a substantial shift in business conditions, we typically see it is the ISM index which in turn can help confirm an associated drop in job growth as something more than just noise in the data.

Bottom Line: The Fed is data dependent; they will be looking for threats to their forecast on either side. This does not mean they will act on those threats. They will act on data that confirms those threats. If you expect the Fed to call it quits soon, you expect the jobs numbers to weaken in conjunction with additional evidence that economic activity is slowing markedly. The ISM report has traditionally been a good early indicator of such a slowdown. Of course, if job growth remains solid and activity just slows but doesn’t threaten to be contractionary, there will likely remain downward pressure on unemployment such that the Fed feels compelled to continue with gradual rate hikes for longer into 2019.

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Despite slowing growth, the Fed remains on track for a December rate hike. The reasoning is simple – even a substantial slowdown in growth from the pace of recent quarters leaves the US economy operating at a pace that exceeds the Fed’s estimates of potential growth. This means that inflationary pressures will continue to grow even if the pace of growth slows. It is not an environment in which the Fed is likely to call off rate hikes. Of course, if growth looks likely to slow more than anticipated, the Fed will react and adjust their expected policy path accordingly. Without more evidence that inflationary pressures are translating into higher actual inflation, the Fed will neither accelerate the pace of rate hikes nor hesitate to pause if the data turns sharply lower than expected.

Incoming data indicate the US economy continues to growth at a respectable pace. That said, fourth quarter growth will likely moderate from the pace of the previous two quarters. GDP tracking indicators from the Atlanta and New York Federal Reserve banks both currently stand at 2.7%. Indeed, it seems almost certain that the heat will come of the consumption numbers, which contributed 4 percentage points to growth in the third quarter; the retail sales numbers today pointed in that direction. That alone will likely temper the pace of growth.

Moreover, it is reasonable to expect that growth will slow further in 2019. Fiscal stimulus will wane if not given a fresh boost, housing has moderated and is not driving growth, the lagged impact of higher rates should be increasingly evident, and, if sustained, slower global activity will take a bite out of growth. Much of this should already be incorporated into the Fed’s economic forecasts, which explains why the median policymaker anticipates growth will slow from 3.1% in 2018 to 2.5% next year. Growth will continue to trend downward into the following year as well. Note that trending downward does not mean we need to go on recession watch; leading indicators overwhelming point toward continued economic expansion. See, for example, low initial unemployment claims.

Yet despite expectations of slowing growth, central bankers anticipate ongoing rate hikes. The next one will come in December; another likely in March 2019 as well. Why? Because the Fed will look at the pace of growth relative to expectations that potential growth is expanding at only 1.8% a year. Hence, the 2.5% growth rate forecast for 2019 remains sufficient to place downward pressure on unemployment and sustain inflationary pressures more generally. The Fed expects that further tightening will be required to ease growth down to a pace that those inflationary pressures wane.

To be sure, it is reasonable to point out that actual inflation does not look worrisome. Central bankers would also reasonably respond that this does not imply that rate hikes should come to an end; they will tend to see stable inflation as a consequence of past rate hikes. In other words, the lack of inflation despite rapid growth stands as evidence that their strategy of preemptive rate hikes was successful.

The lack of inflation is, of course, still very relevant. First, it dissuades the Fed from reacting to low unemployment (they can instead try to squeeze additional slack out of the labor market). Second, it will allow the Fed to move quickly should the economy falter more quickly than expected (but, as should be clear by now, they aren’t going to come to the stock market’s rescue without evidence of damage to the broader economy. Third, it will argue for further decreases in the Fed’s estimates of the natural rate of unemployment, which would in turn place downward pressure on the rate path.

The upshot is that we remain in a familiar place – the Fed is likely to continue hiking rates until they feel confident that they have removed a sufficient amount of financial accommodation to alleviate overheating concerns. If data starts tracking below the Fed’s forecasts, we can expect that the Fed will scale back on their rate hike path. If above, the opposite will occur (side note on this point – while the current expectation is for fiscal stimulus to wane, with the Democrats taking the House, the path of least resistance for Congress going forward may be more spending). 

This is a good place to be. It’s a place where the Fed can be nimble. Of course, during a tightening cycle there is always the risk that the Fed overshoots and plunges the economy into recession. And arguably the Fed’s forecasts highlight this risk as they clearly indicate a goal to restrain the pace of activity. But I don’t think we should worry too much yet absent evidence that inflation looks to be rising to 2.5% on a sustainable basis. Under such circumstances, the Fed would likely adopt a more hawkish and less flexible posture. We just aren’t there yet.

Bottom Line: Goldilocks 2.0 keeps the Fed on its basic policy path, gradually hiking rates but having sufficient room to maneuver such that they can change course if needed. 

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The US economy hit it out of the park in October. Rapid economic growth continues to fuel a labor market that delivers the enviable combination of job growth, labor force growth, and now faster wage growth. So far, this also continues in a low inflation environment. The Fed, however, doesn’t believe that situation will continue forever in the absence of tighter monetary policy. Expect the rate hikes to continue. Furthermore, I think you can make an argument that the labor market is close to the point where inflationary pressures will intensify. Something that everyone seems to think can’t happen anymore.

Nonfarm payrolls rose 250k, a solid above-consensus pace of job growth. Both the three- and twelve-month moving averages are above 200k. Fairly impressive growth for an expansion that is over nine years old. The pace still exceeds the Fed’s estimate of sustainable growth after the cyclical forces driving labor force growth give way to demographics.

That day, however, is not yet at hand. Labor force participation ticked up, which helped hold the unemployment rate at 3.7%. Remember, the Fed anticipates this rate to hold through the end of the year, a bet that looks better this month than last. At least in the near-term, central bankers are labor force optimists.

The labor market does not look likely to sputter anytime soon either. The leading indicator of temporary help employment maintains steady growth, and we all know that initial unemployment claims are not sending out any warnings.

Wages grew 3.1% over the past year; over the past three months, the pace of gains has been 3.4% annualized. It would seem that wage growth appears to be kicking in, albeit at a low unemployment rate than the previous expansion. 

In contrast, real wage growth has been trending sideways around 1% since the unemployment rate hit roughly 5.5%. This number is fairly consistent with productivity growth. Recall Federal Reserve Vice Chair Richard Clarida:

A sustained rise in inflation-adjusted, or “real,” wages at or above the pace of productivity growth is typical in an economy operating in the vicinity of full employment, and we are starting to see some evidence of this. I certainly hope it continues. Now, some might see a rise in wages as leading to upside inflationary pressures, but here, again, the experience of earlier cycles is instructive. In the past two U.S. expansions, gains in real wages in excess of productivity growth were not accompanied by a material rise in price inflation.

Of course, this time may be different, and as with growth, the job market could perform better or worse than the baseline outlook. However, for now, the increase in wages has been broadly consistent with the pickup in productivity growth that I have just discussed, and a rise in the still-low rate of labor force participation among the prime-age population provides scope for the job market to strengthen further without generating inflationary pressures.

Over the past year, nominal wage growth has been creeping up in tandem with underlying inflation to hold real wage growth around 1%. In other words, I think you can make an argument that we are at or beyond full employment with enough pressure on the economy that we see both faster wage growth and faster inflation. In other words, what I am seeing is that the world pretty much works out as you might expect.

If nominal wage growth continues to rise, the increase will need to be felt somewhere in the data – either faster inflation, faster productivity, or tighter profit margins. This is the space to watch. Obviously, the worst-case scenario is higher inflation, the best is higher productivity growth, and tighter profits margins fall somewhere in between depending on who you are in the economy. 

I don’t know yet how this will play out. What I do know is that central bankers are very comfortable with the flat Phillips Curve story, almost complacent. Essentially, they have been surprised so many times by how low they can push unemployment that they don’t really trust their ability to estimate the natural rate of unemployment and are now defaulting to a dovish scenario that allows them to maintain a gradual pace of rate hikes despite fairly hot growth. There don’t appear to be many skeptics left among central bankers. My experience is that when everyone believes the same story, it’s time to get a new story. 

Bottom Line: Jobs data gives no reason for the Fed to think their job is done; rate hikes will continue. 

It’s been a tough few weeks on Wall Street. Equity markets have struggled, with the S&P 500 Index down almost 10 percent from its Sept. 20 record high before finally finding what may be a floor. As is always the case when stocks struggle, market participants start to doubt the Federal Reserve’s resolve. Don’t.

Continued on Bloomberg Opinion…

Friday morning the BLS releases the October employment report. It will most likely leave expectations for a December Fed rate hike intact. We should focus on the unemployment rate and wages. Steady or even an uptick in the unemployment rate would help convince central bankers that they can squeeze more out of the labor market. That said, continued acceleration in wage growth would suggest that any lingering slack may be minimal.

The September payrolls gain was on the soft side; I anticipate upward revisions. The October report will likely be stronger. The consensus expectation is for a NFP gain of 190k in the range of 150k-231k. The ADP report released yesterday estimated a gain of 227k private sector employees, suggesting upside risk relative to the consensus. My model agrees that the risk is to the upside.

The unemployment rate ticked down to 3.7% in September. Wall Street expects it to hold steady; given the variance in labor force participation, anything in the 3.6%-3.8% range should not be a surprise. Whatever the number, we should compare it against the Fed’s current year end forecasts for 3.7% (median and central tendency) issued in September. Recall that this estimate nudged up from 3.6% in June, indicating more confidence that they could get more help from labor force expansion. So far, this bet has been wrong, but could be quickly right given the nature of the data. A downward tick in the unemployment rate would like increase overheating concerns.

Wages are expected to be up 3% (range 2.8%-3.2%) relative to year ago levels. Continued acceleration of wage growth would nudge Powell & Co. toward thinking that maybe they are approaching limits to what they can squeeze out of the labor market.

Bottom Line: It would take quite a dive in the data to stop the Fed from hiking in December. We won’t find that kind of dive int he next employment report. The Fed will tend toward hiking rates until they are confident that economic activity is likely to slow enough that concerns of overheating fade. We aren’t there yet.