The consensus seems to be that the Fed was tightening to bring the rates back to pre-crisis levels. Now, they will actually start the tightening to fight inflation.
ANALYSTS: JOBS DATA KEEP FED ON TRACK FOR TIGHTENING NEXT YEAR
By Steven K. Beckner
Market News International - The November employment report is apt to keep the Federal Reserve on track for
further rate hikes, though not until next year, analysts said Friday.
By the time the Fed's policymaking Federal Open Market Committee meets in March, if not sooner, the Fed is
likely to raise the federal funds rate from 5.5%. Some see the rate going considerably higher by the end of the year
2000.
Analysts observed a continuing lack of acceleration in average hourly earnings given tight labor market conditions,
but noted the upward revision to October earnings and said wage hikes are likely to gain momentum in future months.
The Labor Department announced that non-farm payrolls rose 234,000 in November, following a downwardly
revised 263,000 October gain and an upwardly revised 103,000 September gain. On net, September and October
payrolls were revised up by 21,000. November payroll gains were concentrated in construction and services, while
retail employment increased a mere 1,000. Factory employment slipped a further 2,000.
The unemployment rate remained at 4.1%. Average hourly earnings were up just a tenth of a percent, but October
earnings were revised from 0.1% to 0.3%, following September's 0.5% gain. Average weekly hours edged up from
34.5 to 34.6, while the aggregate hours index rose 0.3%.
New York Fed President William McDonough, caught by reporters at an event in New York City, called the
earnings figures "extremely benign" and said "it's difficult to see a great cause for near-term inflation." But Fed officials
are known to be concerned that wages could begin to accelerate and lead to price pressures if demand doesn't slow
sufficiently to ease labor market strains.
Eventually, Fed watchers said, labor compensation is bound to accelerate given the pace of economic growth and
the degree of labor market tightness.
Alan Levenson, chief economist with T. Rowe Price in Baltimore, said that, taking the October revision to earnings
into consideration, real wage growth "has been unprecedented." He said nominal average hourly earnings gains continue
to look moderate on a year-over-year basis. He said this reflects the lagged effects of wage-setting in a disinflationary
climate created by falling commodity prices. He also credited the Fed for having reduced inflation expectations and
hence wage demands.
But "the deceleration (in compensation) has stopped, and if labor markets stay tight, we are going to start to see a
pick-up," Levenson warned.
Barring an upside surprise in November inflation data, Levenson ruled out Fed tightening at its Dec. 21 FOMC
meeting, as the Fed does not want to "shake up financial markets." But he said "the economy is showing enough
resilience that we need tighter financial conditions to slow it," both in terms of higher market interest rates and in terms
of weaker stock valuations, "and we're not going to get that without more Fed tightening." He said he expects 50 basis
points of tightening in the first half of next year.
Ed McKelvey, senior economist at Goldman-Sachs, said average hourly earnings have remained "surprisingly
subdued given the pace of hiring and the low unemployment rate." He said firms may be "having more success holding
down nominal increases when real increases are fairly good."
But McKelvey said he too "would expect to see more acceleration. ... I'm surprised we haven't to this point
because CPI has begun to turn up."
McKelvey said he expects to see the Fed raise rates at its March 21 meeting "even if wages don't go up." He said a
rate hike could come as soon as the Feb. 2 FOMC meeting if real GDP seems to be growing at a 3% or better pace in
the first quarter. He said he looks for 2.3% first-quarter growth following 5.3% fourth-quarter growth.
Beyond a first-quarter tightening, McKelvey predicted two more rate hikes, which would leave the federal funds
rate at 6.25% by year-end 2000.
Marty Mauro, economist at Merrill Lynch Capital Markets, said the employment report showed that "the labor
markets are healthy, but still no wage pressures." He said it was "a good report for the Fed," in that it allows them to
delay rate hikes beyond December, when he said it does not want to raise rates because of Y2K concerns.
But Mauro said he looks for the Fed "to tighten early in the new year," most likely in March. |
