Written by Richard Hokenson
The March Employment Report provided an abundance of evidence for the Fed to reconsider their projection of two additional hikes in the federal funds rate this year. Even as the unemployment rate fell to 4.5% in March, its lowest level in almost 10 years (see Chart 1), wage inflation remained tepid. Average hourly earnings increased by 2.7% year-on-year, essentially the same as the last 12 months (see Chart 2). This is consistent with our view that the wage-gain trigger, i.e. the non-accelerating inflation rate of unemployment (NAIRU) is close to 4% not 4.7% as the Fed currently assumes.
The language of the statement that accompanied their opportunistic March hike also provides further support that the Fed is still data dependent in evaluating the pace of restraint . It is noteworthy that the statement did not suggest that the labor markets was at full employment, an assessment that we share. Though not yet at full employment, however, there was substantial progress made in March. Unaffected by the storm which depressed the payroll number, household employment maintained its strong pace of gains as did the labor force (see Charts 3 and 4). The probability that someone who was not in the labor force last month will become unemployed this month is at an historic low (see Chart 5). The employment-population ratio for workers aged 25-54 years old rose to its highest level in more than 8 years (see Chart 6). A reminder that there is still more to do, however, is the fact that the probability that the unemployed remain unemployed remains at elevated levels (see Chart 7).
This update was researched and written by Richard Hokenson, as of April 13 2017