Fed State of Play: Sept Jobs Could Convince Dec Holdouts

--Officials Looking Through Headline Job Losses

--Markets Pricing In 80% Odds of Dec Hike

--Rise in Hourly Earnings, Fall in Unemployment Rate Beat Expectations

By Jean Yung

     WASHINGTON (MNI) - The sharp rise in hourly earnings and drop in the

unemployment rate in the September jobs report may persuade holdouts on the

Federal Reserve's Open Market Committee that the U.S. economy is strong enough

for a third and final rate hike for 2017.

     Fed officials will likely look through the loss of 33,000 jobs in Friday's

report, which economists say was distorted by hurricanes and driven by a loss of

105,000 payees in the restaurant industry that will reverse in coming months as

people return to work. 

     For markets, the acceleration in average hourly earnings growth to 2.9% and

the drop in the unemployment rate to a fresh 16-year low of 4.2% fueled a rise

in December hike odds to more than 80%, capping a dramatic reversal in futures

markets which had priced odds as low as 20% when hurricanes were battering Texas

and Florida and geopolitical tensions hit the front page.

     With a sub-4% unemployment rate and faster wage growth on the horizon, Fed

officials are likely to view a December rate hike as more likely.

     Dallas Fed Bank President Robert Kaplan on Friday told CNBC Friday that

"labor markets are tightening" and September's poor showing "in our judgment,

will be temporary." 

     "I'm open minded about December, but I'm not there yet," he said, citing

some uncertainty over whether structural shifts and technological advances could

continue to mute price rises over the medium term. 

     In a separate interview on Bloomberg, Atlanta Fed President Raphael Bostic

acknowledged "strong growth" in wages in September and said he was "in a

wait-and-see mode." Continued strength in economy would make him "comfortable

with a conversation about increasing rates" in December, he said.  

     William Dudley, head of the New York Fed, did not address the employment

report directly in a speech on monetary policy but agreed that a tightening

labor market should support a pickup in wage growth and inflation over time. He

also noted that structural changes may play a role in dampening inflation going

forward. 

     The core of the FOMC believe that an unemployment rate below its longer run

rate of 4.6% cannot be sustained without triggering higher inflation and that it

is only a matter of time before tight labor markets lead to wage and price

pressures. 

     On Friday, the Labor Department said average hourly earnings jumped by

0.5%, boosting the annual rate to a nine-month high. Hourly earnings growth for

prior months were revised higher as well, to 0.5% in July and 0.2% in August

from 0.3% and 0.1%, respectively. 

     The labor force participation rate also rose to a three-and-a-half-year

high of 63.1% from 62.9% as more than a half million people returned to the

labor force. 

     Nearly 1.5 million workers had a job but were not at work due to bad

weather in September, a two-decade high. Still, data collection rates were close

to normal levels and the hurricanes had "no discernable effect on the national

unemployment rate," the Labor Department said. 

     Clearly the unemployment rate is trending lower and likely to fall below 4%

if the robust demand for labor continues while labor force growth remains

limited. 

     Meanwhile, a surge in the ISM manufacturing and non-manufacturing indexes

in September -- consistent with annual GDP growth of nearly 4% -- signals the

economy is picking up momentum as it rounds out the year. 

     Strong global growth and a weaker dollar are boosting manufacturing, while

the vast services sector appears unhurt by the hurricanes. 

     An above-trend growth rate means the fundamentals supporting the economy

remain strong and bolsters the Fed's view that inflation will turn higher into

next year. That has investors convinced that a December rate hike is edging

toward a certainty.

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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