Janet Yellen Gets a Raise
The U.S. jobs report issued Friday was surprisingly good, showing much stronger growth in employment than most analysts had expected. As far as investors are concerned, the Fed's decision on whether to raise interest rates at its next meeting in December is more or less settled.
Nonfarm employers added an estimated 271,000 jobs in October, the largest monthly gain since December 2014, and the unemployment rate declined to 5 percent. Other measures also suggested a tightening of conditions in the labor market. The message looks pretty clear: The economy is at or close to full employment, and it's time to start restoring normal monetary policy.
Crucially, the report offered something Fed officials have long been looking for: evidence that workers are finally getting raises. In October, the average hourly wage was up 2.5 percent from a year earlier, compared with 2.2 percent in the year to September. That's the fastest rate of growth since August 2009, albeit slower than the pace that prevailed before the 2008 recession.
Other indicators still suggest there's more available labor than the headline unemployment rate implies. Part-time workers who want full-time work and people who haven't actively sought work in the past month are more plentiful than they were before the recession. If the unemployment rate took that into account, it would be about 1.3 percentage point higher -- the equivalent of 2.3 million jobs. But this number too has moved down from September.
It's uncertain how many of those people might come back to full-time work if the Fed maintained its strong stimulus, or how soon and how quickly inflation would rise. The possibility of recovering more lost jobs and pushing employment higher argues for a gentle profile of interest-rate increases over the course of next year and beyond -- and for a willingness to change course if the numbers start moving the other way.
To be sure, October is just one month. There'll be another jobs report before December's meeting. The numbers are volatile and subject to revision. Even so, the report is strong enough to simplify Fed Chair Janet Yellen's task.
The Fed has rightly argued for a data-driven approach to policy. Yet lately it has let that message get blurred -- hence investors' calendar-driven preoccupation with action in December. By making the data-based case for action next month much stronger, the new report gives the Fed a chance to put its policy guidance back on a sound footing. The state of the economy, not the time of year, is what counts.
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