After Friday’s employment report, odds are that Fed Chair Janet Yellen will continue to forestall the next rate hike, doing what she can to keep the FOMC from raising rates at the committee’s next meeting on November 1-2. She’ll probably be dragged kicking and screaming by the majority of the committee into a rate hike during the final meeting of the year on December 13-14. However, surely she can deal with one rate hike per year? When Fed Chairman Alan Greenspan normalized monetary policy from June 2004 through June 2006, the FOMC raised the federal funds rate by 25bps at every meeting during that period.
Her opposition to moving forward with the normalization of monetary policy isn’t because September’s employment report was weak. Granted, the 156,000 increase in payrolls was below expectations. But even dovish-leaning FRB-NY President Bill Dudley said in an 8/18 speech that 150,000 per month is good enough to keep tightening the labor market.
In recent months, Yellen hasn’t been spending as much time nitpicking the employment reports for bad news. Instead, she and Fed Governor Lael Brainard, her dovish BFF on the FOMC, have been saying that the good news is the reason for holding off on tightening Fed policy. Remember, she is a liberal labor market economist, and seems to feel the pain of anyone who isn’t gainfully employed if that’s what the person really wants.
So consider the following:
(1) Employment. The good news in Friday’s report is that the labor force rose 444,000 and household employment gained 354,000 (Fig. 1). The labor force has increased 3.0 million over the past 12 months versus up 738,000 during the previous 12 months, and the best such gain since December 2000 (Fig. 2). The household measure of employment is also up 3.0 million over this same period, the best performance since February 2015 (Fig. 3). The number of full-time workers is at a record high of 124.3 million (Fig. 4). Even the labor force participation rate may finally be starting to bottom (Fig. 5). Yellen must be saying to herself, “That’s great, so why throw sand into the job machine now that it is working so well?”
(2) Pay. Wage inflation moved closer to Yellen’s target range of 3%-4% during September. Average hourly earnings for all workers rose 2.6% y/y (Fig. 6). “More great news,” Yellen must be thinking, “so why not give it a chance to move into the target range?”
By the way, contrary to the urban legend that real wages have stagnated for the past 15-20 years, average hourly earnings divided by the headline PCED rose to a record high during August (Fig. 7). For all workers, it is up 1.4% y/y and 8.9% since the start of the data during March 2006. For production and nonsupervisory workers, this measure of real hourly pay rose 1.5% y/y and 13.5% over the past 15 years (since August 2001).
(3) Income. This all augurs well for personal income and spending. Our Earned Income Proxy (EIP) rose 0.6% m/m to a new record high, as Debbie discusses below. It is a proxy for the private sector’s wages and salaries, which is the largest component of personal income. It is also highly correlated with retail sales excluding gasoline (Fig. 8 and Fig. 9). (See our EIP.) I can just imagine Yellen telling Brainard, “Why tinker now?”
Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research. To read more of his blogs, CLICK HERE NOW.
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