Fuzzy Jobs Data Call for Federal Reserve to Be Proactive

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The US economic data are all over the place. The February payroll figures released Friday presented a choose-your-own adventure with something for every monetary policy narrative. That haziness means the Federal Reserve, barring a significant improvement in inflation data due next week, should err on the side of caution and raise interest rates by 50 basis points when it meets later this month to prevent falling behind again in the fight against inflation.

The Bureau of Labor Statistics report showed that US payrolls added a robust 311,000 jobs in February, bringing the three-month moving average to 351,000 jobs even after accounting for slight downward revisions. If the numbers are reliable, that’s still well above the level consistent with population growth and any semblance of a stable and non-inflationary labor market.

Clearly, the report wasn’t black and white, and it was possible to come to other conclusions about how hot the job market remains. Average hourly earnings — a timely if imperfect measure of labor compensation — rose just 0.2% in February, the slowest pace in a year. That fact, as well as an improvement in labor force participation and a slight uptick in the unemployment rate, seemed to delight the doves in early trading Friday, with yields on two-year Treasury notes tumbling 18 basis points.

But as we’ve learned the hard way in the past couple years, all of those stats are subject to month-to-month volatility, and the mixed signals can only mean one thing: the Fed must stay proactive. There might be more inflation on the horizon, and policymakers can’t wait to find out for sure. With this report, Fed Chair Jerome Powell and his colleagues are now slightly more likely to raise interest rates by a half a percentage point to a range of 5% to 5.25% when the Federal Open Market Committee meets on March 21-22. Doing so also keeps market participants on their toes and prevents a counterproductive loosening of financial conditions.

The Fed, of course, is trying to avoid falling behind in the inflation fight again. In 2021, the central bank wrongly identified inflation as a “transitory” phenomenon, and its glass-half-full mindset left it repeatedly head-faked by data and ultimately behind the curve in its campaign. With its credibility on the line on and unemployment still very low, its mindset has understandably shifted to a sort of glass-half-empty perspective on potential inflationary forces.

If the Fed is committed to staying on top of inflation this time, it can’t simply assume the best from Friday’s mixed bag of labor market indicators.

At the start of 2023, the prevailing narrative held that inflation was ebbing and that the labor market was slowing in accordance with the central bank’s goals. But unexpectedly strong jobs, retail sales and inflation data in January upended that story. So, too, did revisions to the government’s seasonal adjustment factors which retroactively made past inflation data look worse than we originally understood. Since then, Powell has committed in his testimony to Congress to increase the pace of rate increases if the “totality of the data” were to show it’s warranted. At this juncture, it looks increasingly as if that’s going to be the case. Even though Friday’s numbers tell several plausible stories, Powell can’t afford to settle on the fairy-tale version.