For some economists, the disappointing September jobs report was a “game changer.”
In a note following Friday’s jobs report, BNP Paribas economists characterised the September report as a “game changer” that will push any action from the Federal Reserve out to next year.
Previously, the firm had forecast the Fed tightening monetary policy with an interest rate hike in December.
Our previous call was a 60% chance of a December hike, with a threshold of 150k for payrolls being our key metric. The September payrolls (including revisions) take us below a 50% chance of a hike this year.
When to move the hike to is dependent on whether this is a soft patch or something worse. Given good household real income growth and rates at zero our assessment is this is a soft patch, though clearly the tightening in financial and monetary conditions and external demand weakness is a factor. We expect the economy to continue to grow above trend.
At this stage we pushed the date of lift off to March.
There are a few things going on here.
On the one hand, BNP notes — as we have this week — that there is a clear divergence between the fortunes of American consumers and other parts of the economy. On the other hand, this divergence still paints a picture of an economy that, on balance, is hitting, as they say, “a soft patch.”
And so taken together, the Fed isn’t likely, in BNP’s view, to raise interest rates without a US economy that appears sure-footed.
Ahead of the September Fed meeting, Wall Street was about split down the middle on whether the Fed would move to raise interest rates. Since that meeting and the subsequent market reaction — with future markets pricing out rate hikes at either the Fed’s October or December meetings — more and more people are throwing in the towel on rate hikes this year.
Last week, Fed chair Janet Yellen reiterated her call that it would “likely be appropriate” for the Fed to raise interest rates in 2015. But as more economic data rolls in, that possibility, at least in the eyes of many on Wall Street, gets more and more remote.
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