Ball Back in Fed’s Court After Blowout Jobs Report

Janet Yellen
Janet Yellen

While there are still 40 days and a minefield or three to negotiate until the next Federal Reserve meeting, traders already believe they know what’s going to happen.

Friday’s nonfarm payrolls report, which showed the economy created 271,000 new jobs in October while the unemployment rate fell to 5.0 percent, fueled what has been a dramatic turnaround in expectations for monetary policy.

Traders now are pricing in a 70 percent chance of the first rate hike in more than nine years at the Dec. 15-16 Federal Open Market Committee meeting. Just a month ago, the probability was barely 5 percent, and it was about 33 percent as of the September FOMC meeting.

If conditions stay amenable to a hike, it will mark the beginning of a new era for investors. Financial markets have enjoyed a funds rate anchored near zero from a central bank that also injected $4.5 trillion in liquidity through its quantitative easing program that ended in October 2014.

Fed Chair “Janet Yellen has to be breathing a huge sigh of relief,” said JJ Kinahan, chief strategist for TD Ameritrade. “Think back to June or July: How many times did she say we’re going to raise rates in 2015?(The payrolls report) is making her look brilliant.”

Maybe so, but the picture can change quickly, particularly in the case of a Fed that has kept the market on edge because of the mixed signals it has been sending.

After all, many on Wall Street had figured on the Fed to begin its hiking cycle back in March. But market volatility spurred by concerns about a slowdown in China and uneven data at home made each FOMC meeting essentially a false alarm and another exercise in the fruitless search for perfection. All this while Fed officials delivered a stream of contradictory public statements regarding policy.

Even Friday’s futures trading reflected some misgivings. Earlier in the session the probability for a hike jumped all the way to 74 percent before easing back to 68 percent.

“With the FOMC bent on delivering their first move before year-end, they are less concerned with the details than the optics and the optics of this report are quite strong,” said Steve Blitz, chief economist at ITG. “To say the details are strong enough to wipe out concerns the economy has shifted to a lower pace of expansion is, however, a bit of an overstatement.”

Indeed, much can go wrong by the Fed’s December meeting, which concludes with a statement on the direction of policy.

October’s report presented a multitude of positive points, from the strong headline number to the 2.5 percent increase in average hourly wages to an increase of 313,000 in the labor force at a time when the participation rate remains mired around 1977 lows.

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Source: CNBC | Jeff Cox