Chief Economist Scott Brown discusses current economic conditions.
The January Employment Report remained consistent with the broader range of labor market indicators. Job conditions are tight. Wage growth has picked up relative to a few years ago, but is not particularly high by historical standards. Thus, the Fed is widely expected to keep short-term interest rates steady in the near term. In this week’s congressional testimony, investors will want to hear Fed Chair Powell’s assessment of the coronavirus, but he will also discuss the balance sheet and money market support efforts – neither of which is quantitative easing (QE).
Prior to seasonal adjustment, nonfarm payrolls fell by 2.83 million in January, which translates into a 225,000 seasonally adjusted gain (reported accurate to ±110,000). Hiring for the 2020 census added 5,000, with a lot more to come in the next few months, although it’s unclear how successful the government will be in finding workers. Annual benchmark revisions lowered the March 2019 level of payrolls by 514,000 (-0.3%), about as expected, pushing down the monthly pace of job growth in 2018 (to +193,000 from +223,000). With this revision, job growth appears to be more clearly trending lower. This has little to do with who’s in the White House or running Congress and more to do with the population dynamics. A long-term sustainable pace of job growth is well under 100,000 per month. We can run ahead of that now as slack is taken up, but job growth should continue to trend lower in the months ahead.
Meanwhile, wage growth remains moderate. Average hourly earnings rose 0.2% in January, up 3.1% year-over-year. The Fed’s approach has shifted over the last year. Instead of activing preemptively (tightening before inflation actually appears), many Fed officials are more willing to wait for inflation to begin to pick up. We should get some clarity on this framework in Fed Chair Powell’s monetary policy testimony. While the economic impact of the coronavirus remains uncertain and is a potential wildcard for monetary policy, no change in short-term interest rates for the time being.
Financial market participants may be more interested in what Powell has to say about the balance sheet and liquidity support for the money market. Yet, we already know. In the Monetary Policy Report to the Congress, released on Friday, the Fed noted that “the size of the balance sheet has been expanding to provide an ample level of reserves to ensure that the federal funds rate trades within the FOMC's target range.” Following the volatility in money market funding in mid-September, the Fed has been conducting repo operations and Treasury bill purchases in order to maintain ample reserve balances over time. While the balance sheet has expanded to maintain ample reserves, “these operations are purely technical measures to support the effective implementation of the FOMC's monetary policy, are not intended to change the stance of monetary policy, and reflect the Committee's intention to implement monetary policy in a regime with an ample supply of reserves.”