Bernanke: don't overweight the jobs report

Bernanke’s remarks today suggest that Friday’s better-than-expected jobs report has not changed the stance of Fed policy too much.

That is not a great surprise. The Fed was not expecting the Friday numbers. They were materially better than expected and might shave a quarter point off policymakers year-end 2010 unemployment forecasts. But one month’s data is just one month’s data. And even confirmation that labour market stabilisation is coming a bit sooner than recently expected does not change the basic calculus as far as policy is concerned.

In basic macro terms, the battle between Fed hawks and doves will be joined in earnest only after we get two or three months of 200,000-plus job creation with an accompanying decline in unemployment. At that point hawks can say recovery is entrenched and it is time to move to, e.g., one per cent rates. Doves will still argue that their unemployment forecasts two years out remain far above the natural rate so there is no need to tighten.

When will we reach this point of sustained 200,000-plus job months? This is really a question of how strong growth will be through 2010 and into 2011. With growth in the 3 to 3.5 per cent range unemployment will likely only edge lower. But if we get growth above 4 per cent then the game starts to look a bit different.

Until we reach months of 200,000-plus job creation, the risk of a Fed rate increase comes mainly from other sources: (1) disorderly dollar decline combined with commodity price surges and instability in inflation expectations and/or (2) emerging domestic asset bubbles. Neither exist yet, but both are on the Fed’s radar screen.

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