Clarity on what the Federal Reserve will do on rates has been in short supply. Friday’s jobs report could change that.
In early August, 82% of economists in The Wall Street Journal’s monthly forecasting survey thought the Fed’s policy-setting committee would raise interest rates at its meeting Sept. 16 and 17. But financial-market turmoil over the past few weeks has altered those odds. Now, economists as a group are on the fence on whether the Fed moves—some say probably yes, others probably no, others give even chances.
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It is a situation where, so long as markets stay reasonably settled over the next two weeks, the jobs report could be the deciding factor. True, the Fed would prefer not to put too much stock in any single employment report, especially considering the substantial revisions it can undergo. But the pros and cons for moving in September are too evenly matched, and the ability of the jobs figures to shape market perceptions is too powerful, for the Fed to ignore Friday’s report.
Economists reckon the U.S. added 222,000 jobs last month, close to July’s 215,000 gain. They look for the unemployment rate to show a decline to 5.2%, from 5.3% in July, bringing it to its lowest level since April 2008, and for average hourly earnings to register a gain of 0.2% on the month.
Such a report, indicating the job market continues to chug along but isn’t generating too much heat, likely wouldn’t stoke any urgency from the Fed.
What would? J.P. Morgan economist Michael Feroli thinks the Fed will stand pat, leaving its target range on overnight rates at zero-to-0.25%. But an increase of 250,000 jobs coupled with a drop in the unemployment rate to 5.1% or 5% would represent a “pretty strong case” for a rate increase, he says. Bank of America Merrill Lynch economist Ethan Harris thinks the Fed will raise its rate range by a quarter point, but that a job gain of less than 150,000 would call that into question.
Even if the jobs numbers seal the deal, though, the tentative nature of the debate is telling for what comes next. It shows that whenever the Fed moves, the next leg of the rate cycle will be a stroll, not a sprint.