An Early Gift to the Fed and Investors


Christmas is less than three weeks away and Hanukkah starts Tuesday night, but the economy gave us our presents early.

On Friday, the Labor Department reported some 228,000 new jobs were created in November, slightly less than the 244,000 created in October but much better than September’s 38,000.

Over the last three months and thus far in 2017, monthly job gains have averaged around 170,000, for a yearly total of two million net new jobs. That’s pretty good, but entirely in line with 2016, the last year of the Obama presidency.

Unemployment remained steady at 4.1%, and wages increased at about 2.5% measured annually.

So, where’s the big gift in all this?

It’s in the combination of those three key numbers.

Job growth of 228,000—and an average monthly gain north of 170,000—shows the economy is humming along nicely. (GDP growth has topped 3% for two consecutive quarters, too.) That’s good for consumer spending, corporate profits, and stock market gains.

Unemployment at 4.1% means the economy is at or close to full employment. That means the Federal Reserve has largely met one half of its dual mandate—to maximize employment.

And yet hourly earnings rising at 2.5% annually show that at least the wage side of inflation isn’t increasing much. (Overall inflation is well under the Fed’s 2% target.)

So, unless tax reform brings in a new era of rapid GDP and wage growth (which I think is unlikely), it looks as if we’ll get a continuation of the economy we’ve had for the last few years. That means an extension of Janet Yellen’s monetary policy under new Fed chair Jerome Powell.

Of all President Trump’s possible choices for Fed chair, Powell was the one most likely to keep calm and carry on. John Taylor, whose name is uttered with reverence in conservative circles, might well have raised the federal funds rate sharply, regardless of how the economy was doing. That actually is the position of Fed hawks, who think current monetary policy is far too loose.

Yellen’s policy was to raise rates gradually, based on the economy’s actual performance, and begin to reduce the Fed’s $4-trillion-plus balance sheet. Friday’s jobs report was strong enough to warrant a ¼ point increase at next week’s Federal Open Market Committee, where she will give her final press conference as Fed chair. It’s also strong enough to call for three or four ¼-point increases in 2018.

But subdued wage growth will probably cap it at that. Gradual rate increases and steady economic and employment growth have kept stocks strong. Absent a black swan or major geopolitical crisis, I don’t see why that can’t continue. That should mean a happy holiday season for investors.