Sifting through the November jobs report, one can choose a data point to support any view of the economic and financial landscape, as well as monetary policy. The jobless rate should be at the top of the list, with its latest decline making it very likely that the Federal Reserve will increase its policy rate by 25 basis points on 14 December to between 0.50% and 0.75%.
Stop and consider for a moment what Americans will hear when they tune in to watch the nightly news or when they read today’s headlines over the Internet:
The U.S. jobless rate fell to its lowest level in nine years in November, falling to 4.6% from 4.9% in October.
On Main Street, the unemployment rate is by far the most understood economic statistic. The attention it garners along with record highs in the U.S. stock market will support consumer confidence and household spending, feeding a virtuous cycle of increases in production, income and spending that will sustain the economic expansion.
With the U.S. economy likely to grow faster than its productive capacity, employers will likely continue to add more workers than enter the labor force, lowering the ranks of the unemployed and placing further upward pressure on wages and inflation.
The jobless rate’s decline will support business confidence, particularly among those expecting to benefit from tax cuts. This will likely compel them to invest and expand, especially with workers becoming scarcer.
Protecting the Fed’s rate-hike path
All of this reinforces the recent upward pressure on market interest rates. For the Fed, the rise in rates is a clarion call. Specifically, if the Fed is slow to respond with additional rate hikes in 2017, it could increase the upward pressure on rates because it would give rise to views that it is falling behind in its fight to keep inflation at bay.
A top goal for the Fed in early 2017 therefore should be to protect the benign view that investors hold about its path on rates.
All of this said, the bond market has obviously gone a long way in a short time, and it has priced in a great deal of prospective information and could well take a respite. With a December Fed rate hike now almost a given, attentions will turn to fiscal policy to determine the outlook for the economy and interest rates in 2017.
Tony Crescenzi is a market strategist and generalist portfolio manager. He is a frequent contributor to the PIMCO blog.