MNI POLICY: Fed Won't Hesitate To Ease If Employment Falters

The U.S. labor market is likely still too hot to allow Federal Reserve officials to comfortably reduce interest rates for now, but any sudden deterioration in employment could lead to sharper-than-expected cuts as policymakers place fresh emphasis on the jobs side of their mandate.

Employment has remained robust despite one of the most aggressive monetary tightening cycles in modern history, with the jobless rate below 4% for two years in a row and jobless claims still hovering just above 200,000 per week.

That consistency caused a shift among policymakers who initially expected significant economic pain from monetary tightening, but now are increasingly hopeful for a soft landing.

While strong employment is not the primary reason to delay interest rate cuts – blame bumpy inflation readings at the start of the year for that – any sharp significant reversal of fortune in hiring would likely prompt a Fed reaction. (See MNI POLICY: Fed's Rate Cut Timeline Shaken By Inflation Bumps)

“As inflation has come down, the two things are moving back into balance. We're not a single mandate bank,” said Fed Chair Jerome Powell in a Q&A this week. (MNI INTERVIEW: Fed Highlights Risk Of Weakening Job Market)

But the hawkish side-effect of a strong jobs backdrop is that it further decreases the sense of urgency toward cutting rates.

Despite some marginal loosening of conditions seen in data points like lower quit rates, employment is still stronger than would be consistent with population growth -- not to mention keeping demand at an even keel. At the same time job openings, which had been falling steadily, have stabilized around 8.8 million.

There is also lingering concern among policymakers about wage growth that, while more moderate than last year, is still above levels seen as consistent with price stability.

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The dovish flipside, however, is that any sudden decline in employment -- or even a substantial slowdown -- could prompt a more aggressive monetary easing from the FOMC than will be the case if the central bank is merely adjusting rates lower as inflation falls to prevent real rates from rising.

“If the labor market deteriorates, we can move rates down sooner and more quickly than in our baseline," said Cleveland Fed President Loretta Mester during a Q&A this week. "Rather than view this as a normalization, the intention would be to return to an accommodative stance of monetary policy to support the economy."

One major question for policymakers is how much the sharp rise in immigration last year that helped unexpectedly boost labor force participation will continue. The Labor Department is set to release its March employment report Friday, with economists forecasting another robust rise of 215,000 new jobs and a decline in the jobless rate to 3.8%.