“Participants agreed that, with the unemployment rate approaching 6.5 percent, it would soon be appropriate for the Committee to change its forward guidance in order to provide information about its decisions regarding the federal funds rate after that threshold was crossed.” - January FOMC minutes
During the last few months/years, the unemployment rate in the US has come down significantly, now nearing the 6.5% mark that the FED said would be a threshold (not a trigger) to revise its monetary policy stance. Additionally, they have argued that even if the unemployment rate is the best SINGLE measure of the "healthiness" of the job market, it only shows a partial picture of the whole market.
In the coming months, the FED will be twisting its language to incorporate a wider range of indicators to assess the improvement in the labor market conditions. Stealing this chart from the Quarterly Inflation Report of the BoE (Bank of England), we replicated the next chart using indicators for the US, where, as shown below, the general condition of the labor market has substantially improved in the last year. The chart shows the z-score of each indicator compared to its mean from 2000 to 2007. As we can see, all of the indicators have shown a meaningful improvement, except for the unemployment and underemployment rate, for which there is some evidence that a structural change is going through.
One of the indicators that I would like to highlight, is the wage growth during the last months. Even if the pace at which salaries are growing is still below historical norms, we are just about to experience a sustained pick up in the income for american workers that, unlike others, is going to have an effect in the inflation figures during the next several months. Everything points to a normalization of the monetary policy as the FED expects, and points a risk to a faster tightening in the monetary conditions compared to market expectations. The curve in the US should flatten again and the USD should recover its gains vs G5 currencies. Equity market seems to be the one that will trade in a range, for the next few months.
