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Short-Term Implications of the Jobs Report

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The weaker-than-expected U.S. jobs report for August should not materially change expectations for the economy, which remains, for now, stuck in a “new normal” low-growth equilibrium.

The data released Friday will amplify expectations of a Federal Reserve that remains looser for even longer, placing downward pressures on market interest rates and the dollar, but that also will have to compete with the latest news from the European Central Bank. And within the Fed, it amplifies the tug of war between those who are worried about lowflation and those concerned about the risk of future financial instability.

Job creation, at 156,000, came in slightly lower than the 180,000 consensus expectations. This was coupled with a downward revision to previous months’ numbers. With the secularly low participation rate remaining unchanged, the unemployment rate edged up to 4.4%. Meanwhile, wage growth remained muted, rising only 0.1% and keeping the annual increase at 2.5%.

Given the usual uncertainties that are attached to these monthly numbers, this report should not, in itself, change expectations of an economy that, in the absence of a major policy effort out of Washington, tracks a real growth path of around 2% with muted inflation. It will, however, solidify market expectations of a continued dovish Fed, including a lower endpoint for the neutral rate and a longer path to get there, along with a very gradual contraction of the balance sheet.

On a standalone basis, the report places downward pressures on market interest rates and the dollar. The extent of this is offset, however, by the latest news from Europe that the ECB is looking to push back its timetable for balance-sheet normalization.

Then there are the implications for what already are tricky Fed policy deliberations. The data will embolden those who fear the lowflation demon and are calling for a delay in further rate hikes and an extremely measured reduction in the balance sheet. But it will also fuel concerns about a looser-for-longer policy stance fueling excessive financial risk-taking by the private sector and increasing the threat of future financial instability.

In sum, the report has some short-term market implications. Much more importantly, it does nothing to clarify the policy questions facing the Fed; and it highlights, once again, the urgent need for a breakthrough on the part of other economic policy-making entities.