With the new economic and trade policy policy commentary coming out of Washington seemingly on a daily basis, along with the much discussed stock correction from February, which was caused by the unwind of the short volatility trade, it's easy to lose track of what the Fed will do in 2018 and how it will affect markets. Prior to the March 2018 Fed meeting the biggest event was new Fed chair Jerome Powell's testimony in front of Congress where he seemed to express bullishness on the U.S. economy. Powell's bullishness combined with the January labor report caused a sharp reaction in markets as real rates rose, inflation estimates increased, the expectations for Fed hikes in 2018 increased, and stocks fell temporarily.
Bullish Powell & Hourly Earnings Growth
It's amazing how the market reacts to news in such an exaggerated fashion. Because Powell said the Fed would revisit its dot plot, the markets hyper-focused on the Fed being hawkish even though Powell also made many statements which could be considered dovish. We would be shocked if the Fed didn't revisit its dot plot since new economic data points have been released since the last meeting. This doesn't mean major changes will be made, but at least reviewing policy is always expected.
The other over the top reaction was when the market suddenly thought inflation was going to soar based on the heightened average hourly earnings growth in the January labor report. That was a silly reaction because there is still a lot of slack in the labor market despite what the misleading unemployment rate and jobless claims reports state. The labor participation rate for prime aged workers still isn't at the level it reached in previous cycle peaks. Secondly, most of those reports are revised, so you can't take each preliminary report as if it's perfectly accurate. The February BLS report completely disproved the January report because the average hourly earnings growth for January was revised down from 2.9% to 2.8% and the growth in February was 2.6%.
The two reasons for this deceleration were the increase in the work week and growth in the labor market. The work week went up from 34.4 hours to 34.5 hours. Whenever the work week increases, the hourly earnings growth usually falls. The weekly earnings grew 2.9%. That was still relatively low considering the jobs growth of 313,000. The economy absorbed those jobs without huge wage growth because many workers came from off the sidelines with the labor force participation rate increasing from 62.7% to 63%.