Jobs Report Complicates Fed Policy


The economy added 173,000 new jobs in August and the unemployment rate edged down by two tenths of a percent to 5.1 percent, the lowest level since the spring of 2008. Although the top line job creation number was short of expectations, the previous two months were revised higher; putting monthly job creation at 213,000 this year and the three-month average at 221,000. With job creation remaining consistently above 200,000 over the past year and the unemployment rate within the Fed’s desired range of 5 to 5.2 percent, the central bankers may believe that the economy is now out of the intensive care unit and no longer requires emergency-level medicine in the form of zero to a quarter of a percent interest rates. As Mark Spindel, CEO and CIO of Potomac River Capital, LLC, noted: “The strength of the U.S. economy came through loudly and clearly in the employment figures announced this morning. As for raising rates, if not now, when?”

That would be perfectly reasonable thinking, if global markets were not in turmoil over a potential hard economic landing in China and the ripple effects that a Chinese slow down is causing in emerging markets and natural resource exporting countries like Canada, Australia, Brazil, Mexico and Russia.

Minutes after the jobs report was released, Mohamed El-Erian, chief economic adviser at Allianz SE and Chair of President's Global Development Council told me “It’s a really tricky call as domestic and external factors are locked in a complex tug of war – domestic economic conditions warranting a hike but global ones urging patience and caution. If global financial instability continues, I suspect that they will wait rather than hike in September.”

As volatility in global financial markets amped up in late August, El-Erian said “The window [to raise short-term interest rates] was open a few weeks ago when you had strong domestic economy, which you still do, you had pretty neutral international economy and the financial markets were in relatively good shape,” but global uncertainty has “turned violently against the Fed, so I don’t think the Fed will take the risk of hiking in this environment, because if it makes a mistake, it will end up making a mistake that will spill back on to the U.S. economy.”

The International Monetary Fund agrees with El-Erian. In a note prepared for the Friday kick off of a two-day G-20 Finance Ministers and Central Bank Governors meeting in Turkey, the IMF warned that “global growth remains moderate, reflecting a further slowdown in emerging economies and a weak recovery in advanced economies. In an environment of rising financial market volatility, declining commodity prices, weaker capital inflows, and depreciating emerging market currencies, downside risks to the outlook have risen, particularly for emerging markets and developing economies.” As a result of that assessment, central banks’ “monetary stance must stay accommodative.”

Paul Ashworth of Capital Economics summed up the debate, when he noted that the August employment report “can be used to make a case for or against a rate hike at the upcoming FOMC meeting. As far as we’re concerned, the September meeting is a 50-50 toss-up. Nevertheless, even if the Fed doesn’t hike rates this month, it won’t leave rates at near-zero for much longer.”


  • DJIA: 16,102 down 3.3% on week, down 9.7% YTD
  • S&P 500: 1,921 down 3.4% on week, down 6.7% YTD
  • NASDAQ: 4,684 down 3% on week, down 1.1% YTD
  • Russell 2000: 1136, down 2.3% on week, down 5.7% YTD
  • 10-Year Treasury yield: 2.13% (from 2.19% a week ago)
  • October Crude: $46.05, up 1.8% on week
  • December Gold: $1,121.40, down 1.1% on week
  • AAA Nat'l avg. for gallon of reg. gas: $2.40, the lowest Labor Day weekend price since 2004 (from $2.48 wk ago, $3.44 a year ago)



Tues 9/8:

6:00 NFIB Small Business Optimism

3:00 Consumer Credit

Weds 9/9:

10:00 Job Openings and Labor Turnover (JOLTS)

10:00 Quarterly Services Survey

Thurs 9/10: 8:30 Import/Export Prices

Fri 9/11:

8:30 Producer Price Index

10:00 Consumer Sentiment