Capital Properties FX
Capital Properties FX

Is the FED Rate Increase in Cards After Last Week’s NFP ?


“I have yet to see any problem, however complicated, which, when looked at in the right way did not become still more complicated” – Poul Anderson

Generally speaking, the Non-Farm Payrolls numbers have been very stable in the U.S .for more than 4 years in a row. The average number of jobs created per month from the beginning of 2014 until present day is 208 000. The FED rate increase in March was justified as the pace of job creation has been strong and consistent.

The importance of wage growth is on the rise as the U.S. labor market is approaching the so-called full employment. The current unemployment rate dropped to 4.4 percent in April which marks the lowest figure since May 2007. In a period of ten years, the U.S. unemployment rate has done a remarkable round trip. In 2007, the rate started to increase from 4.4 percent and reached 10.2 percent in 2009. Today we are back at the starting point.

The probability that the FED will hike the rates in June is relatively high. The FOMC members have also been giving hints that the next rate hike is just around the corner. While the GDP growth pace is somewhat questionable right now, the labor market is not. After a huge disappointment in March, the pace of job creation picked up again in April and hence no one is worried about the labor market anymore.

Read Also: Conclusion After the Federal Funds Rate Decision

Today’s Labor Market

The FED has been watching the labor market ever since the crisis started in 2008. Today we can say that according to the data, the United States has almost reached the so-called full employment. The labor market, in general, is in a very good shape. If you look at the NFP chart from 2003 to present day, it’s hard not to notice that since 2011, job creation is extremely steady, even compared to the pre-crisis era.

However, the market is still relatively touchy when it comes to weaker NFP figures even though one of the side effects of full-employment is a slowdown in job creation. In reality, there’s a new problem developing – shortage of workforce. According to some media outlets, the construction sector in the U.S. is already running short of qualified workers. If the economic activity should pick up again in the second quarter, then the workforce issue should deepen as we go forward.

While job creation and unemployment rate both look very good, there is still one bad apple in the basket and that is the labor force participation rate. For whatever the reason, people who left the jobs market are not coming back and the LFPR keeps on hovering around the 63 percent. Keep in mind that the people who have left the jobs market are not part of the unemployment rate calculations.

Inflation Expectations Are Well Anchored

Changes in inflation will have an impact on FED’s policies. The U.S. inflation figures are starting to look stable around the 2 percent level. As a result, get ready for at least one additional FED rate increase this year. In their last statement, the members of the FOMC pointed out that the path of inflation is close to their longer-run objective, which is of course 2 percent.

In addition, if there is a shortage in the workforce, then usually such a situation puts pressure on wages. Companies start to overbid each other to attract qualified workers. From the employee’s point of view, that is a good thing. However, if it goes too far it will start to weigh on employers. Nevertheless, such an environment will push the inflation even higher and in some ways, that is exactly what the FED needs.

Conclusion: The FED Rate Increase Is On The Table

The next FED meeting date is the June 14th. Taking into account the latest labor market data and inflation figures, the FED rate increase is definitely on the table. Furthermore, Fed likes this situation. The market knows of the potential change in the federal funds rate, hence the dollar shouldn’t react much. Keep in mind that price stability is what Fed targets.

The only questionable piece of data right now is the Q1 GDP figure. As we all know, the U.S. economy grew only 0.7 percent in the first quarter. The Federal Reserve considers the weak outcome as transitory. The FOMC is confident that the economic activity will pick-up in the second quarter and from there on, it will be smooth sailing.

The members of the FOMC gather during the FED meeting dates eight times per year. This means that the June meeting marks the middle point of 2017. After that, we have four additional meetings and only two of them include a press conference. If they should keep the rates unchanged this time, then the next most likely FED meeting time for policy changes is in September.

Capital Properties FX
May 9, 2017

Read Also: U.S. Inflation: Where to?

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