Anthony Chan
Anthony Chan
ahead fear gain labor markets monetary policy rate release report rise robust sting takes
The rise in the unemployment rate takes much of the sting away from the robust gain in payrolls from a monetary policy perspective. The big fear ahead of the release of this report was that labor markets were overheating.
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Even though I don't think one number is going to change the Federal Reserve's mind, the markets react to data as it comes out and these numbers were not inflation friendly.
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As the equity markets react positively to this change, we get a bit of a positive wealth effect which in turn should induce higher consumer spending.
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I think this is an important first step for the central bank. They didn't want to lower rates too aggressively for fear of sending a signal to the markets that they thought things were completely falling apart.
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Today's Fed rate cut and directive clearly reflects the fact that the Fed is coming to the end of its rainbow and therefore wants to ensure that it still can convince financial markets that it still has further flexibility to do more if it needs to.
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More rate cuts may not be forthcoming, but the Fed is also not likely to start raising rates as quickly as financial markets expect.
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This report is actually quite favorable for financial markets since we see very little inflation pressure while simultaneously seeing job creation inching up,
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The best way to describe this report is 'holy cow,' ... This is a great report. We have Alan Greenspan a little bit worried about inflation and certainly the financial markets will realize that those worries certainly continue to prove to be unfounded.
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It's going to make the markets a bit jittery, especially when the market is conditioned to be data-dependent.
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It really tells us the economy is healthy, and at the same time we don't see that labor markets are overheating at an accelerating pace.
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We've seen a sea change in the way the financial markets and economy watchers are looking at the world, ... For many months, people thought the economy was so strong and robust, they could ignore these head winds.
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With this figure, markets can remain all but assured that the Fed will continue to push short term rates higher well into 2006.
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I think the markets probably overreacted when the Federal Reserve first moved toward a neutral operating directive. When Alan Greenspan spoke this time, I think the reality set in and that is, yes, the central bank has a neutral directive, but it's more like an ultra-right (hawkish) form of neutral directive. ... Any time they get an excuse to raise rates, they're going to take it.
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I think that if the Fed goes back to normal language about 'measured pace' (of rate hikes), it becomes a secondary story, ... It is only becoming a big story because of the uncertainty about what they were going to do. The equity markets will be looking for language here again. If it talks too harshly about inflationary pressures, it could be unfriendly for stocks.