Lost in the flurry of Friday’s news cycle, from launched missiles to the Gorsuch confirmation, was the all important Non-Farm Payroll number better known simply as the monthly jobs report. Had it been a normal news day the drastic miss would have commanded larger headlines.
Expectations were for the US economy to add a net of 174,000 jobs to the work force, while in reality the number came in at a meager 98,000. However since the job market force participation number held steady at 63%, the actual headline unemployment rate fell to 4.5%, the lowest in a decade.
472,000 found jobs in the last month while the overall unemployed number dropped by 326,000.
So with all of that said, the question becomes, “Does this keep the Fed on pace to raise interest rates twice more this year?” The Federal Open Market Committee raised the interest rate by 25 basis points to an even 1.00%, as expected. According to the Federal Reserve’s now infamous “dot plan” the majority of FOMC members see the rate around 1.50% by the end of this calendar year, with a few outliers seeing a dip in rates and a few seeing rates shoot up above 2.00%.
Supposedly the Fed has a duel mandate of “moderate inflation” as well as “maximum employment.” The Fed’s has already surpassed its employment goal of 4.7% unemployment. While they have not yet reached their goal of 2.00% inflation (measured using the official CPI number), the Fed’s latest minutes reveal that 2% is not a firm ceiling they are nervous about adhering too. If unemployment remains low and Trump implements a stimulus package by way of an infrastructure plan, the Fed is comfortable allowing the economy to run hot for a relatively short amount of time.
The most recent wrinkle in potential near term Fed policy is the FOMC addressing the possibility of shrinking their $4.5 trillion balance sheet. In the Fed minutes the quote read, “a change in the committee’s reinvestment policy would likely be appropriate later this year.”
Currently when a bond the Fed is holding (they collected trillions worth during the several rounds of quantitative easing) they allow the debt to roll over and reinvest the proceeds earned. A reverse in this policy would allow interest rates to rise in a more organic way than announced rate hikes simply by making more bonds available for purchase in the open market. Such a policy change will be worth a 50 basis point rate hike according to Yellen. The number will not be announced, just the change in policy.
But it is important to keep in mind that the Fed has shown to be at times more concerned in the next 25 point move in the S&P 500 than in their two Congressional mandated reasons for existing in the first place. So with recent geopolitical uncertainty and the S&P having significant international exposure to Trump’s much talked about border taxes, the two rate hikes that are currently a consensus could vanish like Tomahawk missiles into the night.
I will talk further about the Fed’s slavish behavior when it comes to the major indices in future postings.