The most important thing about the jobs report that will be released Friday probably isn't what it says about the past, but about the future.
The October jobs figures will provide a critical hint to the Federal Reserve as it weighs the momentous decision of whether to raise interest rates at its December meeting.
The nation’s central bank is charged with two goals: to ensure maximum employment and price stability. And its track record since the Great Recession hasn’t looked too good. Millions of people lost their jobs, sending the unemployment rate soaring to 10 percent.
In response, the Fed unleashed an unprecedented amount of stimulus: It slashed its target interest rate – its main tool for steering the economy – to zero. It also pumped trillions of dollars into the recovery in hopes of spurring faster growth.
Now, seven years after the crisis, the unemployment rate has fallen by half. The numbers of long-term jobless and discouraged workers are also dropping. In congressional testimony Wednesday, Fed Chair Janet Yellen said she thought the economy was performing well.
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That means for the first time in nearly a decade the central bank is considering raising its target rate. Investors see a 50-50 chance that the Fed will move in December.
“Our statement indicates that December would be a live possibility, but importantly, that we have made no decision about it,” Yellen said Wednesday.
What could tip the balance? Friday’s snapshot of the health of the job market, for starters. Analysts expect the economy will add about 185,000 jobs. If the number falls short of expectations, the likelihood of moving in December gets more dicey.
Job growth already slowed over the summer, and another weak showing would help confirm that trend. There is only one more jobs report after Friday and before the Fed’s meeting at the end of the year -- and it may not be enough evidence to convince the central bank of a turnaround.
But if Friday’s number hits in the ballpark of analyst estimates, it could give the Fed confidence that it is moving closer not only to meeting its goal of maximum employment, but also its directive for price stability.
That’s because the two missions are deeply connected. Economics 101 says that as unemployment falls, the economy grows and inflation rises. For the Fed, that means the way to reach its target of 2 percent inflation is by pushing down the unemployment rate.
Of course, there’s a catch. The economy hasn’t been behaving according to textbook models. The unemployment rate is closing in on what many economists believe is the lowest level possible before inflation starts to rise. But there has been little evidence of price increases. In fact, inflation has been running essentially flat all year.
Some officials at the Fed want more evidence that inflation is actually picking up before raising rates – a “whites of the eyes” approach. But Yellen reiterated this week that she believes starting earlier will allow the Fed to make additional rate hikes more slowly. If inflation failed to materialize, the central bank could change course, she said.
“If we were to move, we would need to verify over time that expectation was being realized, and if not, to just adjust policy appropriately,” Yellen said Wednesday.
The jobs report certainly isn't the only piece of data the Fed will be considering. But it could set the tone for the debate into December.
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