February Jobs Report: What A Relief for the FOMC

This morning’s jobs report for February was strong. The FOMC will be glad that it got out in front of this report, and surely Yellen and her colleagues must be patting themselves on the back for last week’s campaign to get the word out on a March hike. This report validates the decision to hike in March and reinforces their expectation of a steady, but gradual, pace of rate hikes. It will also help Yellen answer what otherwise might have been some tough questions at her press briefing about the decision to hike now rather than wait a bit longer. We still see three hikes in 2017, the first two coming in March and June. We do not see another hike in May as likely. But this report edges the risks further in the direction of four hikes,  and a March move gives them that flexibility if needed. While this report supports the case for further gradual rate hikes, it wasn’t strong enough to make the FOMC worry that it is behind the curve. 

Payrolls increased 235K in February after an upwardly-revised gain of 238K in January. While unusually warm weather likely boosted payrolls, as the outsized increase in construction payrolls suggests, it’s clear that payroll gains remain on a strong uptrend. The headline U-3 unemployment rate declined a tenth, to  4.7%, and the U-6 rate declined two-tenths, both returning to their December levels. The participation rate increased another tenth, following increases of two-tenths in January and a tenth in December. The increase in the participation rate in recent months, in particular, will help allay any concerns the Committee may have that they are behind the curve and need to meaningfully pick up the pace of rate hikes. Another modest gain in average hourly earnings brought the 12-month rate back up to 2.8%, from 2.6% previously.  In our opinion, there’s been some dissonance between some FOMC participants’ comments that wage growth appears to be firming and recent soft data, particularly the ECI. This report doesn’t settle that issue,  but it provides some support for the view wages may be firming some.

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