After last Friday’s strong jobs report, much speculation has begun that the Federal Reserve will move up its timetable for raising their short-term interest rate (the Fed Funds rate). This could be a mistake to make that assumption.
The Federal Reserve has been very clear that they are evaluating a series of labor market indicators. The amount of new jobs created and the unemployment rate are only two of nineteen indicators that they watch.
The Federal Reserve has created a composite index of the nineteen indicators that they monitor and it is called the Labor Market Conditions Index. The Federal Reserve has published the list of indicators that they are monitoring but have not published how they weight each indicator within the index. The indicators that they are monitoring are:
1) Unemployment Rate
2) Labor Force Participation Rate
3) Part-Time Employment for Economic Reasons
4) Private Payroll Employment
5) Government Payroll Employment
6) Temporary Help Employment
7) Average Weekly Hours
8) Average Weekly Hours of Persons at Work
9) Average Hourly Earnings
10) Composite Help Wanted Index
11) Hiring Rate
12) Transition Rate From Unemployment to Employment
13) Insured Unemployment Rate
14) Job Losers Unemployed Less Than 5 Weeks
15) Quit Rate
16) Job Leavers Unemployed Less Than 5 Weeks
17) Jobs Plentiful Versus Jobs Had to Get
18) Hiring Plans
19) Jobs Hard to Fill
The February results for the Labor Markets Condition Index were released yesterday and the index showed that the overall labor market did not strengthen like Friday’s employment report. Both reports were for February, so it is not a timing different between months. The Labor Market Conditions Index slowed from a reading of 4.8 in January to 4.0 in February. This is below the median reading of 4.3 since this recovery began.
When viewing the labor market from the broader view encompassed by the Labor Market Conditions Index combined with the current low inflation readings, the case is not clear that the Federal Reserve needs to move up its timetable for raising the Fed Funds rate.
Of course, that does not stop the markets from worrying about it as evidenced with the recent rise in yields in the bond market.
Steve Scranton is the Chief Investment Officer and Economist for Washington Trust Bank and is a CFA charter holder with over 30 years of investment experience with equities, tax-exempt and taxable fixed income securities. Steve actively participates on committees within the bank to help design strategies and policies related to client and bank owned investments. Steve also serves as the economist for the Bank and has been a featured speaker for both client and professional organization events throughout the Northwest.