Fed: Timing of lift-off remains open after employment report

The US labor market recovery remains on track with a solid employment report (+173k jobs, 5.1% unemployment rate) for August, suggesting the Fed will soon start to raise rates. However, the employment report has not clearly answered the question whether the lift-off will take place in two weeks' time or whether the Fed prefers to wait a little longer against the backdrop of recent turmoil.

This is a solid report, even if fewer new jobs were created than on average over the previous six months (220k). First readings of nonfarm-payrolls for August have typically undershot expectations, but were revised higher later, suggesting problems with data collection or seasonal adjustment. Moreover, revisions added 44k jobs.

At the same time, slack in the labor market is small and decreasing further, as the drop in the unemployment rate to what the Fed considers "full employment" suggests. The widest measure of underemployment also fell, but only a tenth to 10.3%.

Average hourly wages increased 0.3% on the month, a relatively strong gain. In the past stronger increases in one month have usually been followed by a weaker print in the next month, however. We therefore have to wait for next month's data before judging whether wage growth really accelerates. In year-over-year terms wage growth printed 2.2%, still in line with the 5 years sideways trend

"The US economy has made substantial progress over the last few years, even if not everything is perfect yet. Zero interest rates are clearly no longer appropriate. Markets should therefore prepare for a hike sometime in the near future. All in all, the recent performance of the labor market certainly makes a case for a move already at the next meeting in two weeks. However, in the past Fed officials have regularly stated they would rather err on the side of raising rates too late. And with inflation well below the Fed's target, there is still a good chance the Fed majority believes there is little cost associated with waiting until December while the central bank has time to evaluate the effects from the recent turmoil in EM and other markets",says Commerzbank