Interest Rate Meeting Minutes Underpin Fed’s Belief That Job Market ‘Remains Strong’

The Fed highlighted 'solid' job gains, low unemployment, and high consumer confidence
February 20, 2020 Updated: February 20, 2020
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The Federal Reserve released on Wednesday the minutes of its latest interest rate-setting meeting, which reinforce the Fed’s belief in the strength of America’s labor market.

The minutes of the Federal Open Market Committee (FOMC) Jan. 28-29 meeting show officials confident in the robustness of the U.S. labor market, citing “solid job gains” and low unemployment in support of this conviction.

“Labor market conditions remained strong, and that real gross domestic product (GDP) increased at a moderate rate in the fourth quarter of 2019,” the committee said.

Officials at each of the committee’s previous meetings since March 2019 used the same “strong” label to characterize the jobs market.

‘Tentative Cracks’

The Fed’s contention of labor market strength is supported by metrics like job growth and the unemployment rate.

Still, the U.S. labor market is not without its blemishes, a Deutsche Bank research note stated, claiming “some tentative cracks in the ‘strong’ labor market story.'”

“Job openings have plunged over the past year,” the note said, jointly authored by Deutsche Bank economists Matthew Luzzetti, Brett Ryan, and Justin Weidner.

The economists blamed weaker demand for the job openings slowdown, which they argued was “evidenced by a softening in the trends for overtime hours and the average workweek as well as stagnating wage growth.”

But the analysts concluded that, despite soft spots, the labor market “does not signal an imminent slowdown in activity.”

“As our recent work on jobless claims showed, as long as continuing claims remain at low levels, near-term recession risks will be subdued,” they said, referring to people remaining on unemployment after filing an initial claim.

A recent U.S. business cycle report (pdf) written by Nick Reece, senior financial analyst and portfolio manager at Merk Investments, found evidence for the Fed’s optimistic claim of job-market strength.

Also, Reece concludes overall that the risk of a near-term recession is low, and that “the U.S. business cycle picture near-term is more positive than negative.”

“The 3-month moving average of job gains is 211,000, overall a strong level,” Reece said in the report, referring to the so-called “non-farm payrolls” figures tracked by the department.

“I’d get incrementally negative on this picture if the 3-month average for job gains fell below 135,000,” he noted.

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Net monthly change in non-farm payrolls (gray) with 3-month moving average (black). (Courtesy of Nick Reece/Merk Investments)

Another gauge that he said painted a positive picture was U.S. unemployment momentum, or a comparison between the unemployment rate and its 12-month moving average, which is the same measure of joblessness but smoothed out over time.

“I’d get incrementally negative on the business cycle outlook if the unemployment rate moved above its 12-month moving average while the labor force participation rate trended lower,” he noted.

The labor force participation rate is at a 7-year high in the United States.

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U.S. unemployment momentum chart. (Courtesy of Nick Reece/Merk Investments)

Consumer Confident, Growth ‘Stronger’

The FOMC minutes also show that the Fed believes that while inflation pressures came in softer than expected, the American consumer remains confident.

“The real PCE appeared to have risen more slowly in the fourth quarter than in the third quarter,” the FOMC noted, referring to the Personal Consumption Expenditures (PCE) inflation index against which the Fed measures its own inflation target, the so-called “symmetric 2.0 percent objective.”

The Fed said PCE-measured inflation pressure was softer than expected in the fourth quarter of 2019, but not soft enough to subdue consumer confidence.

“Key factors that influence consumer spending—including the low unemployment rate, the upward trend in real disposable income, high levels of households’ net worth, and generally low-interest rates—remained supportive of solid real PCE growth in the near term,” the Fed judged.

In the minutes, the committee also cited recent University of Michigan and the Conference Board consumer sentiment surveys to reinforce its characterization of consumer confidence as “strong.”

Finally, the minutes said the Fed’s official staff economic outlook at the January meeting projected U.S. real GDP growth at a level “stronger than in the previous forecast.”

In the business cycle report, Reece noted that the current quarterly annualized GDP growth forecast (QoQ SAAR), the most common measure of economic output, stood at “around 2.5 percent” for the first three months of 2020.

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Atlanta Fed GDPNow GDP forecast. (Courtesy of Nick Reece/Merk Investments)

Risks

The Fed noted risks to its economic outlook, the minutes show.

“The threat of the coronavirus, in addition to its human toll, had emerged as a new risk to the global growth outlook, which participants agreed warranted close watching,” the committee warned.

Some FOMC participants also expressed concern about high levels of corporate debt, as well as “elevated” valuations of stocks and commercial real estate.

Others highlighted financial imbalances like excessive debt and overvaluation, which they argued had the potential to “amplify an adverse shock to the economy.”

The current low-interest-rate environment and the tight labor market had the potential to increase risks to financial stability, other members judged. At the same time, some noted that “cyber attacks could affect the U.S. financial system.”

The next FOMC meeting, at which Fed officials will decide whether to hike, hold, or slash interest rates in response to their assessment of the economic picture, is scheduled for March 17-18.

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