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Jobs Report Gives a Green Light to Fed

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
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The October jobs report on Friday provides a domestic green light for the Federal Reserve to raise rates when its policy-making committee meets on Dec. 15-16. Whether it ends up doing so will be a function of two things: whether the balance of the U.S. data in the next six weeks is consistent with the report (which I think will be); and whether international conditions remain as calm or calmer than they are today (more of a question mark, though the Fed can have a beneficial influence).

Three data points stand out, two of them in a very positive way.

First, the U.S. economy added an impressive 271,000 jobs in October, shattering consensus expectations. Together with favorable revisions to earlier estimates and unemployment declining to 5 percent, the report confirms that America’s job-creation machine remains one of the strongest in the world, if not the strongest.

Second, and equally encouraging -- especially after the prolonged period of frustrating wage sluggishness -- average hourly earnings rose by a solid 9 cents to $25.20, taking the one-year growth number to 2.5 percent.

The third, however -- the participation rate -- was the one major job indicator that failed to signal robustness. The civilian labor force participation rate remained stuck at a historically low 62.4 percent. Having said that, part-time and so-called marginally attached workers declined, adding to the view that labor-market slack is declining.

Because of the things the Fed considers as part of its dual mandate to maintain stable prices while ensuring maximum employment, this jobs report is consistent with the central bank hiking rates for the first time in almost 10 years. But since the Fed’s policy-making officials don't meet for another six weeks, it matters a lot what happens in the interim.

Needless to say, the Fed will pay a lot of attention to forthcoming economic numbers including, of course, the November employment report that will be released in a month’s time. Although the numbers are unlikely to be as strong as the October figures, they probably will reinforce perceptions that the U.S. economy continues to heal.

The only thing that would stop the Fed from raising now is a return to the August turmoil in international financial conditions, particularly due to developments in emerging economies and patchy market liquidity. This is certainly a risk given that growth in the emerging world continues to slow, that pockets of financial excesses there have yet to be sufficiently addressed and that broker-dealers continue to seek to reduce their exposure to risk, lowering market liquidity.

While the Fed isn't as influential in emerging economies as it is here, it isn't powerless. What it needs to do is consistent with the communication challenge that faces it domestically -- that is, do more of what Fed Chair Janet Yellen did earlier this week.

Other Fed officials need to add their voices to Yellen’s in re-affirming that what matters for the U.S. economy and markets (and, therefore, for the global system as a whole) isn't when the Fed hikes first but where it will stop the cycle and how it will get there. This message -- that the coming cycle of rate increases would be the loosest tightening in the modern history of the Fed -- needs to be repeated over and over in the next six weeks. It must do this not only to prepare markets and companies, thereby lowering the risk of undue financial volatility and economic damage here, but also to reduce the chance that any international turmoil spills back to the U.S. economy.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Mohamed A. El-Erian at melerian@bloomberg.net

To contact the editor responsible for this story:
James Greiff at jgreiff@bloomberg.net