The February employment report will be released Friday. The most likely outcome is the direction key variables in the report mirror their January outcomes. It is unlikely that the outcome of the report will, by itself, have much impact on monetary policy now that the Fed is in “patient” mode. Absent a dramatic near-term shift in the pace of activity, the Fed will focus on the totality of the data over the next few months before making a decision about the next policy move.
Nonfarm payrolls jumped by 304k last month while the unemployment rate climbed to 4.0 and wage growth pulled back to a 1.3% annualized rate (3.2% year over year). Wall Street expects payroll growth to slow to 178k (range of 138k-200k). That expectation is consistent with my model:
The unemployment rate will likely edge back down (consensus expectation is 3.9%) now that furloughed government workers and contractors are back on the job. Importantly, the Fed will be keeping a close eye on labor force participation; solid gains in participation are holding unemployment fairly constant over the past year, which lessens any residual concerns about overheating. Wage growth is expected to pick up and drive the year-over-year growth to 3.3%. Wage growth in that zone would not be considered inflationary by Fed policy makers.
Overall, the expectation is that we continue to see the labor market deliver Goldilocks outcomes of continued job growth, stronger labor force growth, low unemployment, and improving wage growth. That kind of combination will keep the Fed happily on the sidelines. Reasonable departures from this story on either side would likely be met with a shrug. The data after all is volatile and the Fed has already been clear they are in no rush to make another policy decision.
Separately, New York Federal Reserve President John Williams presented his current economic outlook. Critical points were that he estimates potential growth to be about 2% while actual growth is expected to slow to 2% as last year’s tailwinds fade or become headwinds. He lists the usual lions, tigers, and bears:
Three developments contribute to this view: a downturn in global growth, heightened geopolitical uncertainty, and the effects of tighter financial conditions.
With actual growth equal to potential growth at already low unemployment rates, the world is pretty much perfect according to Williams:
From the perspective of monetary policy, the overall picture of the economy is about as good as it gets: very low unemployment, sustainable growth, and inflation just about at our 2 percent goal.
And policy is neutral:
Given this favorable situation, when you look at monetary policy, things are looking pretty normal as well. My current estimate for r-star is 0.5 percent, so when you adjust for inflation that’s near 2 percent, the current federal funds rate of 2.4 percent puts us right at neutral.
Williams is now back to his old self. Remember, just a few months ago he was telling us not to pay too much attention to r-star. Now r-star is back to its old place at the beginning, center, and end of Williams’ analysis.
The policy implications are at this point well known – it’s all data dependent. If growth looks faster than anticipated, they may need to snug policy higher a bit. If growth falters, rates are heading down.
Bottom Line: The Fed generally believes they have policy and the economy just about where they want it, not too hot, not too cold. The employment report is expected to fall in line with that view.