Friday’s jobs report that the US economy created 156,000 jobs in September wasn’t a major landmark for the Fed. While the jobs figure was below consensus, both the total NFP number and private sector job creation for August were revised up.
In the same "on the one hand, on the other hand” manner, the unemployment rate rose to 5% returning to the 5-handle, but the participation rate also rose slightly to 62.9%. Average hourly earnings rose by 0.2% on the month, but the workweek remained flat.
The labor market statistics provided no clear signal on whether the Fed would increase interest rates soon, and the equities market fluctuated wildly during the day. Investors expecting a Fed pivoting point will have to wait for more data to come over the next several weeks.
What could prompt a Fed decision, and will the Fed move by year-end? We have two more meetings this year, on November 1 – 2, just days before the presidential elections; and on December 13 – 14 for the last time this year. Despite repeated statements by Cleveland Fed’s Loretta Mester that the November meeting is a “live” one for deciding on the first rate hike of the year, proximity of the elections gives the decision a near-zero probability of actually taking place. Both hawks like Ms. Mester and doves like Fed Chair Janet Yellen stress the Fed’s independence whenever they can and emphasize that they make decisions without consideration of political factors. Reminds us of the quotation from William Shakespeare in Hamlet, “The lady doth protest too much, methinks”.
The Fed has long been a politically influenced body. If you are old enough, you remember Chairman Arthur Burns being bullied by President Nixon into increasing money supply massively in 1971 to finance the Vietnam War, or the hapless G. William Miller in the Carter administration who bore a major responsibility for the double-digit inflation in 1979 – 1981. Chairmen like Paul Volcker, who boosted interest rates to unprecedented levels in the early 1980s to squeeze out inflation despite a deep recession, may have been more the exception than the rule in US monetary history. And today’s Fed is no exception to the rule.
The Fed passed on a rate hike last month, not because it was waiting for some pathbreaking data in the final quarter of the year, but because it was already getting uncomfortably close to the elections. A rate hike on September 21, by creating a massive correction in US equity markets, would have significantly boosted the election prospects of Donald Trump on November 8. Mr. Trump, who has publicly charged that Fed Chair Yellen is continuing with low interest rates to help the Obama administration, has signaled that he will not renominate her if he is elected President. Ms. Yellen’s term ends January 31, 2018, and the next President will likely make the “Go / No Go” decision by late-summer 2017.
On the other hand, “data dependence” has become a term of convenience for the Fed rather than a decision rule. Chair Yellen’s reference to “the continued solid performance the labor market” in her Jackson Hole speech in late-August led investors to think that the Fed would tighten policy last month. Less than a month later at her press conference on September 21, measures of labor slack were described as little changed since January. Why? In essence, the Fed needed to change the facts to justify not moving on rates, rather than base its decisions on facts. Lies, damn lies and statistics!
What will the Fed do in December? Unless hell freezes over in the next 9 weeks, the Fed seems determined to hike due to concern that otherwise their credibility may drop below the already low level. Such considerations were what prompted the rate hike of December last year. But again, as happened then, a new rate hike is likely to prompt capital outflows from China, put pressure on its currency, and push global equity markets into deep correction territory in the new year. And the Fed may go into dovish territory again.
Plus ça change, plus c’est la même chose! (The more things change
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