The Fed Doesn't Really Care About Jobs Number

Today we got an update on a whole slew of numbers that most of us recognize by name, but as soon as they come out to play, we look like deer in headlights.

Which is fine - there are too many gosh darn metrics out there to follow and understand as it is.

So let me sort through this one for you.

Payrolls. Unemployment. Wages. Participation rates. Or, collectively: The jobs report.

And this morning's report was...uhhh...not subtle.

The expectation was for roughly +55K jobs, with unemployment expected to hold around 4.1%.

Instead?

United States Non-Farm Payrolls

+162K jobs.

Nearly 3x expectations.

Unemployment stayed put at 4.1%, labor-force participation ticked higher to 61.6%, and wages rose 0.3% for the month and 3.1% from a year ago.

Oh, and July - which had originally shown the economy losing 23K jobs - was revised all the way up to +21K according to the BLS Employment Situation News Release.

So yah. That was a beat.

Normally, a number like that makes payroll Friday the event.

Except Christopher Waller - one of the governors on the Federal Reserve Board - basically told us yesterday that it might not be.

And Waller isn't alone.

My boy Warsh made essentially the same distinction at Jackson Hole last Friday: the labor market looks broadly consistent with full employment.

Inflation is where the Fed's attention belongs.

Waller put it pretty plainly yesterday:

If [disinflation persists] over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting... If the incoming data for August show [disinflation] has been fleeting, then it may be appropriate to raise the policy rate when the FOMC meets on September 15 and 16.

And:

I don't expect that the employment data will deviate much from what we have been seeing. So my decision on the appropriate stance of policy will be heavily influenced by what we learn about August inflation.

Well...

About that first part.

162K is certainly a little more exciting than what we've been seeing lately.

But here's what makes today's report interesting: the unemployment rate didn't fall, wage growth didn't suddenly explode, and the participation actually increased.

And despite the huge headline number, Waller's broader argument that the labor market is in pretty decent shape looks more right than wrong.

In other words: Today's jobs report probably didn't break Waller's thesis. It reinforced half of it.

The labor market is fine.

Maybe better than fine.

Which means the question now becomes whether a stronger labor market gives the Fed more room to worry about the thing Waller was already worried about: Inflation.

To a layperson like me, the message is pretty simple - the Fed doesn't appear particularly worried about jobs right now.

And after today's report, it has even less reason to be.

So unless something materially changes, inflation is still going to have the bigger say in September.

If inflation keeps cooling, Waller says he's inclined to hold.

If inflation comes in hot, he's inclined to hike.

Bookmark September 11. August CPI comes due.

There's something else Waller said yesterday that deserves at least a little attention.

We may not need that many new jobs anymore. Paraphrasing, of course.

Through July, the U.S. had added an average of roughly 60,000 jobs per month this year.

A few years ago, that would've looked...Errrrmmm...Not great.

Today, Waller thinks something around that neighborhood may actually be enough. Why?

United States Labor Force Participation Rate

Because the labor force itself isn't growing nearly as quickly (see chart above).

Lower immigration means fewer new workers entering the labor force, which means the economy doesn't necessarily need to create 150K or 200K jobs every month just to keep unemployment from rising.

And then this morning we went and created 162K anyway. We are so silly like that.

But here's where things get even more interesting.

Look at the market's reaction.

Yesterday, after Waller spoke, stocks ripped higher. The S&P 500 gained a little over 1%, the Nasdaq climbed about 1.4%, Treasury yields fell slightly, and the dollar weakened.

The market heard Waller and basically said: Cool. Maybe no hike.

This morning, the jobs report landed and the market immediately started walking some of that back. Pretty much right back to where we started.

Markets Reaction to Waller and Jobs Report

The 10-year Treasury yield jumped back toward 4.8%, the dollar strengthened, and the CME FedWatch has the probability of a September rate hike moved back toward 60%.

So in less than 24 hours, markets have essentially gone: Maybe the Fed doesn't have to hike.

Then: Okayyyyy...maybe they do.

Which is kind of hilarious considering the number Waller told us really matters hasn't even arrived yet.

And then there's oil.

It's still hanging around $90+, with Brent even higher. Waller is most likely a smart guy - he knows this.

He specifically acknowledged higher energy prices as an upside risk to inflation yesterday.

But he also said something important: so far, those higher energy costs haven't really spilled over into the prices of everything else like he once feared they might.

At least not yet (yes I get you might already be feeling the impact - I'm just talking from their ivory tower point of view).

So maybe the Fed isn't ignoring oil.

Maybe it's saying: Show me the transmission.

Expensive oil by itself is one problem. Expensive oil making transportation, food, manufacturing, services, and everything else more expensive is a very different problem.

And to them... that's why September 11 matters.

Before Waller spoke yesterday, markets were pricing roughly a 63% chance of another rate hike in September.

Afterward?

Basically a coin flip.

Then today's jobs report dropped and hike odds climbed right back toward 60%. That's a pretty bonkers 24-hour round trip.

And it tells you exactly what markets are wrestling with.

Yesterday: show me the inflation data first.

Today: Okay, but 162K jobs isn't exactly helping.

Which brings us to the actual takeaway from this morning.

If payrolls had come in at 30K, we would've spent today talking about whether the labor market was weakening.

If they came in around 55K, everyone would've shrugged. Instead, they came in at 162K.

The labor market just looked the Fed directly in the eyes and said: I'm good, thanks.

And strangely enough, that may make next week's inflation report more important - not less.

Because the Fed's dual mandate involves both employment and prices. Right now, employment isn't giving policymakers much of a reason to ease up so the spotlight shifts even harder toward prices.

And the backdrop isn't exactly boring: oil is above $90, the labor market just blew past expectations, inflation is still above the Fed's 2% target, and financial markets are bouncing between no hike and hike depending on whichever piece of economic data arrived most recently.

All while the Fed is waiting for evidence that inflation is actually going away.

And then there's the political elephant in the room.

Chris has mentioned before that President Trump has made no secret of the fact that he wants lower interest rates - not higher ones.

So if August CPI comes in hot enough to push the Fed toward another hike, the decision won't happen in a political vacuum.

The Fed will still be making a monetary-policy decision based on its mandate.

But it would also put the central bank's institutional independence back under a very bright spotlight.

Which, again, makes September 11 even more bonkers.

Because today's jobs report answered one question pretty convincingly: The labor market isn't falling apart.

Now we find out whether inflation is.