August’s employment report was the last major data release prior to the Fed’s meeting in September that could determine a reversal of monetary policy for the first time in nine years. The less-than-spectacular headline number leaves the FOMC’s options open, though consensus estimates the first interest rate hike will be in September or December. Overall, the economic outlook remains healthy after unemployment fell into the full-employment range, wage growth climbed, auto and home sales have been robust, and second quarter GDP soared to 3.7 percent.
Employers added 173,000 jobs last month, below the consensus estimate of 220,000 anticipated by Wall Street. Gains were largely in financial activities, social assistance and healthcare. The BLS also tacked on 44,000 jobs to the previous two months. Real estate was the largest contributor to the financial activities sector with 8,000 new positions, while childcare employers contributed 16,000 workers. Unemployment dipped to 5.1 percent, a larger than expected decline. Manufacturers and oil companies pared payrolls to the tune of 17,000 positions during the month. The mixed report failed to provide market watchers a definitive picture on the near-term future of monetary policy.
The Case of a September Increase
The Fed has ample reasons to justify an interest rate liftoff in September despite below-expectations job growth last month. Over the past five years, the seasonal adjustment in August has been notoriously inaccurate as schools go back into session and survey response rates are low. The average underestimate in the final figure has averaged 79,000 positions. Combined with strong domestic economic indicators, such as auto and home sales, the economy appears to be improving at a modest pace. Furthermore, wage growth, which has long been a concern for the FOMC, climbed 2.2 percent in the past 12 months.
The Case for a December Increase
August’s employment report also provides the Fed with plenty of cover to delay an interest rate hike until December. Although the FOMC meets between September and December, the Fed only holds a press conference every other meeting, and a shift in interest rates would warrant the question and answer session. Turmoil in the Chinese markets, which has dragged down the value of domestic securities into correction territory, is a concern for the Fed. An increase in interest rates could also trigger a flood of capital back into the U.S., damaging the economies of emerging markets. Additionally, inflationary pressure is not a concern and the potential rise in interest rates is largely based on speculation that inflation is poised to inch higher.
Decision makers will need to balance a domestic agenda with a global one when considering the first interest rate increase in nearly a decade. The Fed’s dual mandate, to promote maximum employment and price stability, does not extend to the stock market. That said, tumbling equity values could impact employment and is a consideration for policymakers. Whether or not the Fed acts in September or December is increasingly irrelevant as the markets will assume a December hike if the Fed kicks the proverbial can down the road. A lack of certainty is one of the largest contributors to unrest, lending credence to a more likely than not September rate hike.
Sources: HomeUnion Research Services, Bureau of Labor Statistics, Federal Reserve, National Association of Realtors, U.S. Bureau of Census, U.S. Bureau of Economic Analysis