The U.S. labour market showed surprising strength in May. Nonfarm payrolls rose 172,000, easily surpassing the consensus forecast of 85,000, while upward revisions to the prior two months added a further 93,000 positions. The three-month average monthly gain now stands at 188,000, a dramatic turnaround from the negative 4,000 average recorded in February. Pessimism about the employment leg of the Federal Reserve’s dual mandate, which was widespread earlier in the year, has been dispatched by three consecutive strong reports.
Private payrolls advanced 120,000, with leisure and hospitality contributing 70,000 and education and health care adding 40,000. Cyclically sensitive sectors also posted solid gains, with construction up 17,000 and manufacturing adding 7,000.
The unemployment rate held at 4.3 per cent for a third consecutive month, while average hourly earnings rose 3.4 per cent year-over-year, easing from 3.6 per cent in April and landing slightly below expectations.
Markets responded sharply to the report. Bond yields rose, equities fell, and Fed funds futures fully priced in a rate increase by year-end. The three hawkish dissenters at the last Federal Open Market Committee (FOMC) meeting, who had sought removal of the downward-leaning language in the post-meeting statement, have been vindicated by subsequent data. That language will almost certainly be removed at the June 17th meeting. The doves, who argued that labour market softness justified maintaining an easing bias, find their case increasingly difficult to sustain in light of the last three reports.
The current juncture revives one of the oldest debates in monetary economics: flexibility versus commitment. The framework governing U.S. monetary policy from the Greenspan era onward has relied on discretionary policy as a stabilizing force, with forward guidance used to smooth monetary policy transmission. The architecture of modern central bank communication, with its carefully calibrated language around future policy intentions, reflects that tradition.
Critics, many associated with the Hoover Institution, a policy think tank where new Fed Chair Kevin Warsh has been a fellow for 15 years, have long argued for a rules-based alternative. The case for commitment holds that a simple rule-based policy — such as the Taylor rule, which links interest rates to inflation and economic slack — can produce better outcomes by anchoring expectations and reducing the scope for policy inconsistency. Under such a framework, the current combination of above-target inflation and reaccelerating employment would call clearly for tightening. The incoming Fed leadership appears more sympathetic to that view, preferring less forward guidance regardless of directional content. Whether Warsh will follow a Taylor rule approach has yet to be tested.
Independent Opinion
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