At the beginning of last week, monetary policymakers were trying to keep the dream of June alive. Via Bloomberg:
“I would put more probability on it being a real option,” Lockhart told reporters at the Atlanta Fed’s financial markets conference at Amelia Island, Florida, when asked about the low implied odds of a move next month. “The communication of committee participants and members between now and mid-June obviously should try to prepare the markets for at least a realistic range of possibilities” for the next policy meeting...
...Williams, a former head of research to Fed Chair Janet Yellen, said he would support raising rates at the next meeting, provided the economy stayed on track.
“In my view, yes, it would be appropriate, given all of the things that we’ve talked about, to go that next step,” Williams told Kathleen Hays in an interview on Bloomberg Radio. “But you know, a lot can happen between now and June.” Williams is also not an FOMC voter this year.
Later in the week, however, financial market participants took one look at the employment report and concluded the Fed was all bark and no bite. Markets see virtually no possibility of a Fed rate hike in June.
That - a desire to keep June in play coupled with insufficient data to actually make June happen - all happened faster than I anticipated. But don't think the Fed will go down without a fight. New York Federal Reserve President William Dudley played down the April employment numbers. Via his must-read interview with Binyamin Applebaum of the New York Times:
I wouldn’t make too much about the headline payroll number being a little softer, because there’s other things in the report that are more positive. For example, total hours worked were up quite a bit; average hourly earnings were up quite a bit. So there’s actually a lot of income being generated from the labor market. And the data on payrolls is quite volatile month to month — 160,000 sounds like a lot weaker than the 200,000 people were expecting, but it’s actually well within what you’d expect in terms of normal volatility. It’s a touch softer, maybe, than what people were expecting, but I wouldn’t put a lot of weight on it in terms of how it would affect my economic outlook.
I would agree that the report is within the bounds from normal volatility. From my tweet ahead of the report:
The pace of job growth has softened, though only modestly so:
But if we view the labor report through Janet Yellen's eyes, the picture becomes somewhat murkier:
Generally solid numbers, but I can't help but notice the unemployment rate is flattening out, and so too has progress on part-time employment and long-term unemployment. Indeed, I found this from Dudley somewhat odd:
The news from this latest payroll unemployment report was actually quite positive in terms of the long-term unemployed. I think what’s happening is, as we’ve run the labor market to a higher degree of utilization, the long-term unemployed are getting picked up and getting more employment opportunities.
He appears to be focusing on just the last month of data while ignoring the trend over the last year. But someone at the next FOMC meeting will surely draw that trend to his attention.
Note that unemployment is settling into a level slightly above the Fed's estimate of the natural rate of unemployment:
For Yellen, this should be something of a red flag. The plan was to let the economy run hot enough that unemployment sank somewhat below the natural rate, thereby more aggressively reducing underemployment. Now, you can argue that this plan has faltered for a good reason - the labor participation rate rose, placing upward pressure on the unemployment rate. That however gets you to the same place as a more negative story. It reveals that there is substantial excess capacity in the labor market, and consequently the Fed should not be in a rush to raise rates. Indeed, because they have underestimated the slack in the economy, they need to let the economy run hot for even longer if they wish to push inflation back up to target - of which it remains woefully below:
Bottom Line: The Fed breathed a sigh of relief after financial markets stabilized. That opened up the possibility that June would still be on the table, leaving them the option for three rate hikes this year. I don't think that policymakers will abandon June as easily as financial market participants. My sense is that they will remain coy, implying odds closer to 50-50. But the data are not in their favor. The employment report was by no means a disaster, but nor was it a blowout. Moreover, I think they will be wary to hike rates until unemployment resumes its decline or underemployment more broadly improves. And we won't have enough data to see such a trend until September.