(The opinions expressed here are those of the author, a
columnist for Reuters)
By James Saft
Feb 3 Don't look to the Federal Reserve to take
away the punch bowl from the Trump party in risk assets.
Friday's payrolls data showed an economy creating jobs at a
fair clip, but without the buildup in wage pressure which might
force the Fed to raise interest rates rapidly.
In January, 227,000 jobs were added to the rolls but average
hourly earnings grew at only 2.5 percent year on year, a
disappointing figure given it included the impact from increases
in minimum wages in many jurisdictions at the beginning of the
That means that with inflation accelerating, though low, and
wage growth bumping along a bit higher, wages are now growing
more slowly, in real terms, than they have over the past two and
a half years.
Riskier assets like stocks rallied in response while
government bonds sold off, as investors bet that the
benefits corporate profits derive from fiscal stimulus and less
regulation won't be diminished by a faster pace of rate
"The evidence on labor market tightness abated in January.
There is no additional pressure on the Fed to move beyond its
indications of gradual rate hikes," Stephen Gallagher and Omair
Sharif of Societe Generale wrote in reaction to the data.
Indeed, if anything, there is less pressure. Futures prices
show that investors think the probability of a 25-basis-point
hike at the Fed next meeting in March has halved from just
before the payrolls were released, to just 9 percent. Traders
further see interest rates ending the year at just a bit over 1
percent, implying just two hikes. This contrasts strongly with
the Fed's own forecast from December, which predicted an
end-2017 rate of 1.4 percent.
It may not last, but risk assets are now in an unusually
sweet position: reflation without too much inflation. The sum
impact of Trump policy changes on corporate profitability will
likely be positive, at least in the short term, but the nagging
risk is that rising rates prompt investors to impose a discount
on the value of future corporate cash flows.
As that risk ebbs, little stands in the way of a continued
And though the Fed does have reason to want to get a bit of
sea room between it and the zero lower bound, leaving it some
ammunition for the inevitable downturn, it also has some good
reasons to want to let any recovery run on a little.
TIME TO RUN "HOT"?
One school of thought within the Fed, decidedly dovish, is
that after a once-in-a-generation downturn there is room to
allow the economy to run slightly 'hot' thereby drawing
discouraged and retired workers back into the work force and
giving the great mass of labor an opportunity to enjoy
above-inflation wage growth.
Charles Evans, a noted dove and a voting member of the Fed's
rate-setting committee this year, sounded in line with this
argument Friday in a speech, nodding both to the desirability of
measured rate increases and lower unemployment. In this view,
the rate of unemployment which the economy can have and not see
inflation get out of hand has fallen.
Evans, though, goes further: "I expect that under
appropriate monetary policy the unemployment rate will
undershoot the natural rate a bit over the medium term. Modestly
undershooting the unemployment goal for a time will help boost
inflation toward its target," he said.
In other words, drawing workers back into the work force
isn't just an instrument, at this point in the cycle, useful to
achieve the Fed's employment mandate but even, at these very low
levels, to its inflation one.
There was a good bit in the jobs report to support this
view, and a good bit to allay other concerns as well.
Not only was wage growth subdued, but the sectors which
might benefit from Trump border tax and other industrial
policies, and which might employ the pool of labor now on the
sidelines, seem if anything to be struggling.
The unemployment rate in durable goods manufacturing jumped
to 4.5 percent from 3.7 percent, taking it to its highest in
more than a year. Trump policies which otherwise might raise a
red flag to Fed officials fearing inflation, like a border tax,
may seem slightly less inflammatory today.
Remember too, equity investors, wage pressure leads to lower
corporate profit margins. That may be coming, but not yet or not
at a pace once feared.
Neither, it seems, will interest rate increases. The party
may just be getting started.
(Editing by James Dalgleish)