The Federal Reserve just got some more wiggle room.
The July jobs report showed U.S. economy added 209,000 jobs in July, less than the 230,000 that was expected by economists, as the unemployment rate edged up to 6.2% from 6.1%.
But wage growth was also flat month over month and came in below expectations on a year over year basis, data that is a little inconsistent with employment cost index (ECI) data reported yesterday which showed employment costs grew 0.7% in the second quarter.
Many traders attributed yesterday’s market sell-off to this report, which some believe suggested that inflation was running quicker than the Fed’s current forecast, potentially forcing the central bank to raise interest rates before the market expects.
But the Fed appears to still be cautious on the health of the labour market, saying in its policy statement on Wednesday that, “a range of labour market indicators suggests that there remains significant underutilization of labour resources.”
And following the jobs report, Eric Green at TD Securities said, “If strong ECI compensation data was thought to bring the Fed closer toward raising rates the data today does not… It doesn’t change the trend toward a less dovish Fed, it simply does not accelerate that process.”
Concurrent with the jobs report, the latest personal spending report also showed that inflation remains tepid.
This report showed that “core” personal consumption expenditures in June, the Fed’s preferred measure of inflation, gained 1.5% over the prior year and 0.1% over the prior month, showing inflation still running below the Fed’s 2% target.
On Wednesday, the initial estimate for second quarter GDP showed the economy grew at a 4% annualized pace in Q2, leading some to suspect that economic growth might force the Fed to change its stance on monetary policy.
The same day, the Fed’s latest monetary policy decision showed the Fed maintaining the current pace of tapering its quantitative easing program while keeping interest rates near 0%.
In a note following today’s jobs report, Russ Certo at Brean Capital said, “As far as I can tell, this report confirms that the Fed had it ahead of their statement.”
In short, Certo speculates that the Fed knew the jobs report would show the economy continuing to improve at what the Fed calls a “moderate pace,” but not improve so quickly that it would force the Fed to change its policy stance.
The Fed has said it expects to conclude its quantitative easing program in October, and is expected to keep interest rates low for some time after that.
Recent discussion surrounding Fed policy has continually asked if the Fed is “behind the curve,” or keeping interest rates below where the economy indicates they ought to be.
Friday’s jobs report was slightly worse than expected, but overall still solid and marks the sixth straight month of monthly job gains over 200,000, the longest such streak since 1997.
But with wage growth tepid, and the economy appearing to grow in-line with the Fed’s expectations, it seems that at least for now Janet Yellen’s hand will not be forced.
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