Solid Report Reinforces Our Call

The June jobs report was solid, but we don’t see it meaningfully affecting the timing of the next rate hike or announcement of a change in balance sheet policy. We continue to expect an announcement on balance sheet policy at the September meeting and the next rate hike at the December meeting. The data on payrolls and hours worked were the strongest part of the report. But the uptick in the unemployment rate and the modest increase in hourly wages likely damped any urgency that FOMC participants may have been feeling to tighten policy, particularly because the focus right now is on the inflation data and whether the softness will prove temporary. 

Payrolls increased 222K in June, well above the consensus expectation, and previous months’ gains were revised up a total of 47K. Previously, the three-month average increase had been 121K, which was a  downshift in the pace, but now it’s back up to 194K. Total hours worked also posted a nice gain, reflecting the robust gain in payrolls and a bump up in the workweek. This should provide some support for income and consumption in the coming months. Despite the recent tightening of the labor market, wage gains have remained subdued. Average hourly earnings increased a modest 0.2%, with the 12-month rate remaining at 2.5%. As for the household survey, the unemployment rate ticked up a tenth, to 4.4%, reflecting in part a one-tenth rise in the participation rate. The broader U-6 unemployment rate edged up two tenths, reversing the decline in May. The story here remains that the unemployment rate (U-3), as well as the U-6 rate, have declined substantially since the fourth quarter of 2016 even as the participation rate has moved sideways. 

How FOMC participants view this news may depend in part on how hawkish or dovish they are. Hawks are more likely to see this as suggesting that the FOMC should continue gradually raising rates since payrolls continue to be added at an unsustainable pace even though the labor market is already getting tight. On the other hand, doves may see this as evidence that the labor market has more room to run. After all, average hourly earnings haven’t picked up in a way that would suggest the labor market is tight: The 12-month change remains at 2.5%, and over the past six months they’ve grown at only a 2.1% rate, down from 2.4% in the last employment report. 

However, FOMC participants would likely broadly agree that this report, particularly the increase in hours worked and payrolls, gives them more confidence that the economy is on track, which bodes well for an announcement on balance sheet policy in September and also for a third rate hike this year. But for that third rate hike to come in September there will have to be a turn in the inflation data, which is why we don’t see this report as significantly impacting the probability of a September rate hike.

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