Friday’s jobs report confirmed that the labor market’s hot run continued in February despite the cold weather that disrupted activity across much of the country. The better-than-expected data was widely interpreted as reinforcing the likelihood that the Federal Reserve will begin raising interest rates in June — but some economic details could still call that into question.
The Bureau of Labor Statistics reported this morning that the unemployment rate fell to 5.5 percent as the economy generated a very strong 295,000 jobs in February. At the same time, the workforce contracted by 178,000 and labor force dropped slightly. Wages continue to grow only slowly.
This morning’s report was interpreted by some Fed watchers as evidence that a rate hike is needed now. “The time has come for the curtain to fall on zero rates, assuming the FOMC is truly data dependent,” wrote Peter Boockvar, chief market analyst for the Lindsey Group. “For those who believe that zero rates is bad policy after six years (me), hopefully the data is reducing the excuses for a continuation of current policy. Capitalism doesn’t work right under financial repression and savers can maybe finally rejoice, relatively speaking.”
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Ian Shepherdson, chief economist with Pantheon Macroeconomics, suggested that wages should soon start to rise at a faster rate, given that employers surveyed by the National Federation of Independent Businesses (NFIB) now say they have more unfilled job openings than at any time since April 2006.
“Note that the NFIB's hiring intentions number, the best true leading indicator of payrolls, points to further big increases until mid-summer at least, so the Fed is likely to see nothing but strength as the June FOMC approaches,” Shepherdson wrote. “Yes, the oil industry is suffering, but it is tiny. We remain of the view that ‘patient’ will be dropped at this month's FOMC, with rates set to rise in June.”
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Other economists were far less certain, pointing to other data points that the Fed is watching, like the personal consumption expenditures measure of inflation.
“Today’s data reiterates that the labor market is likely where it needs to be for the Fed to begin tightening,” wrote Bricklin Dwyer and the U.S. economics team at BNP Paribas. “However, the FOMC needs to be confident in its inflation forecast before hiking, and with core PCE inflation low and expected to move lower…that condition has not been met.”
“Job creation is proceeding at a good pace and unemployment and underemployment are falling, but wage growth has been anemic and far from what would indicate an overheating economy,” wrote Chad Stone, chief economist at the Center on Budget and Policy Priorities. “That means the Federal Reserve should stay patient and let the labor market continue to heal before starting to raise interest rates.”
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Writing on his blog, New York Times columnist and Nobel Prize-winning economist Paul Krugman cautioned Janet Yellen, Stanley Fischer and the policymakers at the Fed not to look at Friday’s report — particularly the falling unemployment rate — and assume that the economy has reached a point at which hiking rates is a necessity. He even urged the FOMC to tolerate a little inflation if that’s the price of further raising employment levels.
“Maybe full employment really is 5.3 percent unemployment, and by the time that’s clear the inflation rate will have ticked up a bit above the Fed’s target,” he wrote. “But that would not be a large cost, whereas sliding back into the liquidity trap would be very, very costly. So please, Janet, Stan, and company, think it possible that you may be mistaken.”
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