MacroScope

Pinning down the January effect on U.S. jobs figures

With Wall Street grappling to hold on to its record highs, a lot is riding on good news from the U.S. economy, no matter how high the Federal Reserve has set the bar for backing off its clear plan to end its monetary stimulus program this year.

After two huge upsets in a row on the important U.S. economic data releases since Christmas — December non-farm payrolls and the January ISM manufacturing report, forecasters are lining up again for an improvement in hiring.

The latest consensus from Reuters Polls is for a rebound to 185,000 after net hiring collapsed to just 74,000 the month before.

The new figure is surprisingly similar to the last consensus of 196,000 – giving the impression forecasters are hoping the December figures were a blip and are sticking to their usual tendency since the Great Recession began to predict  that the economy will soon revert back to the trend it was at before the collapse of Lehman Brothers in September 2008.

Only a handful of economists have dared to revise down their forecast after a disappointment on the ADP payrolls data from Wednesday. That suggests most have learned the lesson that disappointment or surprise on ADP – it was much stronger than expected in December – gives no clear steer one way or the other on what will happen with the official jobs data that come out a few days later.

Baby it’s cold outside: monetary policy as outer wear

Discussions about central banking are often belabored by analogies to moving vehicles, which make some sense given that interest rate policy can act both as accelerator and brake on economic activity. Perhaps tired of being in the driver’s seat, Minnesota Fed President Narayana Kocherlakota decide to switch gears and talk about clothing instead.

In an attempt to illustrate that interest rates are low because of economic conditions, not the whim of policymakers, Kocherlakota compares monetary policy to a protective jacket that needs to be worn when the weather gets rough but can slowly be removed as the summer approaches.

Why have real interest rates fallen so much? At one level, the answer is obvious: monetary policy. The FOMC has announced its intention to keep the fed funds rate near zero at least until the unemployment rate falls below 6.5 percent. At the same time, the FOMC has bought over $3 trillion of longer-term assets issued or backed by the government. With inflationary expectations well anchored, these actions are designed to push downward on real interest rates and have been successful in doing so.