April Jobs Report: The Fed Implications

May 2, 2014 11:14 AM
By Zane Brown

Could stronger-than-expected growth in nonfarm payrolls prompt the Fed to hike interest rates ahead of schedule?

The Federal Reserve may be gratified by the implicit economic strength of the April  employment report, but it will look beyond the headlines to shape future monetary policy. 

That move was briefly criticized as overly optimistic in the wake of a Commerce Dept. report showing that first-quarter gross domestic product grew only 0.1% and recent signs of weakness in housing. On April 30, the Fed appeared too upbeat in its perception of the economy. After the April employment report, the central bank appears prescient.

But April’s employment strength, even with upward adjustments of 36,000 to the February and March payroll figures, should not serve as a catalyst for earlier rate hikes by the Fed.  Nearly all of the details behind the employment release from the Bureau of Labor Statistics support the Fed’s guidance that rates will continue to remain low for an extended period.  The civilian labor force dropped by 806,000 in April.  The labor force participation rate fell by 0.4 percentage points, to 62.8%, the same level as it was in October 2013.  Average hourly earnings were unchanged.  Factory overtime was unchanged.  The average workweek was unchanged.  The manufacturing workweek decreased by 0.2 hours.

The Fed will likely remain optimistic about the prospect for gradual improvement in economic growth, but at the same time will feel justified and committed to its current guidance.  Until we see visible improvement in the details, from the participation rate to hourly earnings, Fed policy, even in its guidance, will remain unchanged.  However, at the same time, as evidence increases that economic growth is gaining momentum, investors can expect the yield on the 10-year Treasury note to begin to creep higher.

What impact could a stronger U.S. labor market have on Fed policy? Share your thoughts in the Comment section, below.

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