The Employment Report was not as strong as it appeared.
-Scott J. Brown, chief economist, Raymond James
February job market data were stronger than expected. However, the Employment Report was not as strong as it appeared. Mild weather likely helped the payroll figure, while the unemployment rate fell mostly because people dropped out of the labor force. This isn’t the “substantial improvement” the Fed wants to see (as a threshold for ending QE3).
Let’s review the Fed’s monetary policy framework. In its forward guidance, the Fed plans to keep the overnight lending rate (the federal funds target rate) exceptionally low (0% to 0.25%) for at least as long as 1) the unemployment rate is above 6.5%; 2) inflation one to two years out is projected to be below 2.5%; and 3) inflation expectations remain well anchored. These are thresholds, not targets, guideposts, not goals. For example, the Fed could keep the federal funds target rate low even if unemployment falls below 6.5%, if inflation was projected to be well below the 2% target rate. The Fed expects to continue its Large-Scale Asset Purchase program until it sees “substantial improvement” in labor market conditions. This qualitative threshold is vague. In making its assessment, the Fed will weigh a number of economic indicators, including the unemployment rate, measures of job loss and hiring, and the quit rate.