If it’s possible to create any more drama around the timing of a Federal Reserve interest-rate hike, Friday’s jobs report will do it.
Odds are, the August employment report—the last before the mid-September meeting of the Fed’s policymaking committee—will include Goldilocks numbers that continue to leave everybody speculating about whether the Fed will hike short-terms rates this month, or wait till later this year. But it’s possible the August numbers will be convincing enough to make a September hike nearly certain, marking an end to the era of super-low interest rates that began nine years ago.
Economists estimate that employers added about 225,00 new jobs in August, which would be slightly better than the pace of job growth so far this year. Here’s what is likely to happen based on where the official government numbers come in:
More than 275,000 new jobs in August: This would probably guarantee a September rate hike, especially if data on wages and labor-market participation also improve. If the Fed didn’t hike amid signs of robust job growth, it would signal serious lack of resolve at the central bank or worries about some persistent problem others don’t see.
Between 225,00 and 275,000: Hand-wringing at the Fed will continue and a rate hike will be a close call. “Sometimes it’s tough to pull the trigger,” says Mike Thompson, chair of Standard Poor’s Investment Advisory Services. “I just don’t think they have the courage to do it” without a higher number. Others feel the Fed is eager to get away from near-zero interest rates and will move even if the jobs number is around the consensus estimate. Call it 50-50.
Below 225,000: If the jobs report is a disappointment, it will seriously erode the likelihood of a September rate hike. That wouldn’t necessarily be a big deal. “The timing of a rate hike doesn’t matter for the economy,” says Ryan Sweet, Director of Real-Time Economics for Moody’s Analytics. “But it will matter for financial markets.” That’s because Wall Street is obsessed with the timing of a hike and the short-term disruptions (aka trading opportunities) it is likely to create, whenever it happens.
Other factors will weigh on the Fed’s decision, besides the overall number of new jobs and the unemployment rate, widely expected to fall by one-tenth of a point to 5.2%. One big missing piece of the labor market recovery has been wages, which are barely growing at the rate of inflation, now around 2%. That means the average worker isn’t getting ahead. The good news is that the labor market has to tighten before wages go up, and that tightening is underway. A recent Fed report even found signs that wage growth may be starting to pick up.
The Fed also wants to see continued improvements in the so-called U-6 rate, which measures not those without a job but also people working less than they would like. This indicator has improved sharply, but is still higher than it was before the recession that began in 2007. The Fed wants to know it’s headed back toward traditional lows.
Once the Fed does hike, it can still hedge its bets somewhat by softening its message about future moves. “It could increase rates but indicate that it’s very dovish in forward guidance,” says Sweet. “It could say there will be no more hikes this year, and lower its expectations for rates in the future.” It could also remind the world that even with an increase in short-term rates—to 0.25%, say, or even 0.5%—rates remain remarkably low. It will still be a good time to borrow.
Rick Newman’s latest book is Liberty for All: A Manifesto for Reclaiming Financial and Political Freedom. Follow him on Twitter: @rickjnewman .
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