Strong job additions
The minutes of the FOMC’s (Federal Open Market Committee) March 2015 meeting reveal that policymakers are happy with improvements in the labor market. Non-farm payroll additions were strong and the unemployment rate fell to 5.5%—its lowest level since May 2008. These February 2015 data were the latest available when the meeting was held.
Maximum employment is one part of the policymakers’ dual mandate. The other part is price stability. Unlike inflation, however, for which the Fed has a specific target, there’s no target for maximum employment. So policymakers come out with individual projections that are then combined to measure their overall expectations with respect to the unemployment rate.
The SEP (“Summary of Economic Projections”) that was released in December 2014 shows the unemployment rate’s expected central tendency. Over the long run, policymakers expect it to range from 5% to 5.5%. Central tendency excludes the outliers—the three highest and three lowest projections for an indicator. So, when the unemployment rate for February actually read in that range, there was visible excitement among market participants and policymakers alike.
Equity markets (IVV) tumbled with utility stocks such as Wisconsin Energy (WEC), Southwestern Energy (SWN), and Chesapeake Energy (CHK). And bond yields soared (TLT) (AGG) on expectations that the FOMC might be confident enough to take an aggressive stance on monetary policy in its March statement.
Policy decision can’t stand on one leg
The March statement, however, remained dovish because labor market metrics alone can’t justify a policy move.
FOMC participants note that some slack remains in the labor market. As well, in the March 2015 SEP, policymakers set the new central tendency range for long-run unemployment rate at between 5% and 5.2%. So, even the unemployment rate has some way to go before the labor market metrics are deemed stellar.
In the next article, we’ll look at some recent developments in the labor market that could impact monetary policy.