uploads///The Employment Report Has Historically Been a Major Signal Monetary Policy Change

Have Headline Payroll Figures Fallen in the Fed’s Pecking Order?


Oct. 16 2015, Published 3:03 p.m. ET

Headline payroll figures seem to have faded somewhat in significance, at least when it comes to foreshadowing action by the Fed. Rick Rieder explains.

The Bureau of Labor Statistics’ monthly employment report is commonly thought to be one of the most important signals of major change in forthcoming US monetary policy.

However, while this should be the case, lately the headline figures seem to have faded somewhat in significance, at least when it comes to foreshadowing action by the Federal Reserve (the Fed).

headline payroll figures vs funds rate

Market Realist – The Fed’s actions are more difficult to predict now.

The graph above compares the effective federal funds rate with the monthly change in non-farm payrolls over the last 30 years. As you can see, prior to the financial crisis, the funds rate more or less followed the trajectory of the non-farm payroll changes, suggesting that the employment report had an important weight on the Fed’s policy rate decisions.

However, this relationship broke after the recession. While the zero interest rate policy helped the economy get back on track, strength in the labor market in the last few years didn’t warrant “emergency interest rates.”

The fragility in global financial markets (URTH) was a factor in the Fed’s decision to hold its policy rates in September. We’ll discuss this decision at length later in this series. However, economic data is still an important factor in the Fed’s decisions. It’s just that there are other factors in play now that make them difficult to predict.

Weak macro data like the relatively muted jobs growth in September and stagnant retail sales have supported US equities (IWM) and bonds (AGG)(TLT). The ten-year Treasury (IEF) is now back to sub-2 levels, yielding 1.9% as of October 14. This is because weak economic data could lead to a further delay the normalization of rates.

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