Currency Briefing: US economic recovery not yet a done deal

By: Tsvyata Petkova
Tsvyata Petkova
Tsvyata reports prmarily on foreign exchange market and daily fx rates. Today, she is a leading FX Dealer for… read more.
on Feb 10, 2014
Updated: Oct 21, 2019

Janet Yellen’s first appearances before Congress as US Federal Reserve chair will be closely watched this week. Ms. Yellen is due to appear tomorrow before the House Financial Services Committee to speak on monetary policy and the state of the economy, and on Thursday she reprises the appearance before the Senate Banking Committee.

Yellen’s task of presenting a Fed outlook on the US economy will not be assisted by Friday’s jobs report from the Labor Department that showed a mixed picture at best, with worse-than-expected jobs growth of 113,000 but a reduced unemployment rate of 6.6 percent. That anemic jobs report in January makes it much harder to treat December’s disappointing report of just 74,000 newly-created jobs as a one-off.

On the contrary, the January number appears to confirm fears that the US labour market has slowed.
The Labor Department reported that the unemployment rate, which is based on a survey of households, fell slightly to 6.6 percent from 6.7 in December, marking its lowest level since October 2008. Of itself, the print can be lauded but what is more important is that the fall in the unemployment rate occurred even as the labour force participation rate – the proportion of the population either working or actively looking for work – rose to 63 percent from 62.8 the prior month (after 499,000 people rejoined the work force). The rise is mainly due to the expiration of emergency jobless benefits at the end of 2013 which in January pushed more people back into the workforce.

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The mixed signals in January’s labour market report put more time at the Fed policy-makers’ disposal. For now, expectations are unlikely to diminish that the central bank will cut its monthly bond purchases by another $10 billion when the FOMC next meets in March. By then, the February labour market data should have shed further light.

The Fed’s more pressing task is to decide what to communicate to the markets about an unemployment rate that has fallen very close to the 6.5 percent threshold below which the central bank has said it will consider raising short-term interest rates. Back in December 2012, when the Fed set that benchmark, it didn’t see the target being hit until the end of 2015. The dilemma now lies in the growing expert opinion that much of the falling unemployment rate is due to large numbers of Americans dropping out of the labour force. Were that not the case, the experts posit, the unemployment rate would actually be at 7.5 percent. And if the participation rate was at 2007 levels, unemployment would be 10.9 percent.

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There is now the growing prospect that the Fed will have to lower its unemployment rate threshold or scrap it altogether, instead indicating that it is watching a range of labour market indicators. For investors though, either step will mean even less clarity on how much and in what ways the US economy must improve before the Fed raises rates.
In these uncertain times, market participants will be scrutinizing Janet Yellen’s every word this week and then every report until the FOMC’s March meeting, so as to decide exactly where the US economy stands and what will be the Fed’s next move.
*Editing by Frank Quin*

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