Jobs Report Justifies Yellen's Patience on Rate Hike Timing

  • Wage-growth slowdown in January eases concerns over inflation
  • Fed chair set to testify before Congress later this month

Fed’s Williams Sees Some Arguments to Hike Rates in March

Federal Reserve Chair Janet Yellen doesn’t need to commit.

The moment Federal Reserve officials published their projections in December for three rate hikes in 2017, Wall Street’s betting on when those would occur ratcheted higher. January’s U.S. employment report gives the chair plenty of room to defer while policy makers wait for evidence of how new measures from the Trump administration are affecting the economy. That’s the message she’ll probably convey during congressional testimony on Feb. 14-15.

“This makes her life easier,” said Vincent Reinhart, chief economist at Standish Mellon Asset Management in Boston, and a former senior Fed staff member. “She can say the U.S. economy has ongoing momentum heading into 2017, but there are no evident cost pressures.”

Investors trimmed bets on a rate rise at the March 14-15 Fed meeting to a probability of 24 percent, versus 32 percent seen Thursday, after Labor Department data showed a less-than-expected 2.5 percent gain in average hourly earnings from a year ago. That was the weakest increase since August.

Click here to see a dashboard of labor indicators used by Fed Chair Janet Yellen

Gauges of business and consumer sentiment are up, and investment in equipment rose for the first time in five quarters in the final three months of 2016. In its January statement, the Fed acknowledged the shift in confidence without signaling any urgency to raise rates.

U.S. central bankers are trying to manage an unusual moment in policy. President Donald Trump’s team is starting to roll out proposals on boosting growth through deregulation, tax reform, and infrastructure spending. Meanwhile, incoming data tells Fed officials the economy has yet to alter course. Growth is steady and inflation is in a gradual uptrend, but remains below their 2 percent target. Unemployment is low, but policy makers don’t need to rush to raise rates because indicators of economic slack still remain.

January payrolls surged by 227,000, beating the 180,000 median estimate of economists. The unemployment rate rose to 4.8 percent from 4.7 percent for reasons Fed officials welcome: the labor-force participation rate rose to 62.9 percent from 62.7 percent. Put simply, more people are deciding to opt in to the job market and look for work, and that gives the economy more room to run.

“So far, the fact that the unemployment rate has bounced up and down a tenth or two, and it’s related to relatively good news on labor force, I view that as a sign of a healthy labor market, and that’s a continuation of healthy trends,” Chicago Fed President Charles Evans told reporters after giving a speech in Olympia Fields, Illinois.

Some indicators of labor-market slack also increased, which should push away inflation concerns. The underemployment rate, which includes people stuck in part-time work who want a full-time job, rose to a three-month high of 9.4 percent.

“We are clearly not generating much wage pressure,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “This report didn’t challenge the call for three rate increases in any way. However, it did not create any urgency for March either.”

    Before it's here, it's on the Bloomberg Terminal.
    LEARN MORE