U.S. Jobs Just Blew the Roof Off. Here’s Why Fed Still on Hold

(Bloomberg) --

A gangbusters November U.S. payroll report sent Treasury yields soaring but hasn't erased bets the Federal Reserve will keep interest rates on hold through at least the first quarter of 2020. And that makes sense.

While employers added an unexpectedly strong 266,000 jobs in in November, inflation remains low and Fed Chairman Jerome Powell has as good as ruled out a rate increase unless price growth picks up on a sustained basis.

“We would need to see a really significant move up in inflation that's persistent before we would consider raising rates to address inflation concerns,” he told reporters on Oct. 30. That was after the U.S. central bank cut rates for the third straight meeting and clearly signaled policy was on hold unless there was a big shift in the outlook.

Investors see it similarly. Pricing in interest-rate futures signal almost-zero likelihood of a hike at the Fed's Dec. 10-11 meeting and have policy on hold at least through June, though odds of another cut tip above 50% around September. A Bloomberg survey of economists conducted Dec. 2-4 had them on hold through 2021.

Price pressures measured by the Fed's preferred gauge of inflation excluding food and energy rose 1.6% in the year through October and have been under the Fed's 2% target for most of the last seven years.

That said, there were signs in the payroll report that the tight labor market is feeding into wages, even if those pressures have yet to spill into a faster pace of inflation.

Average hourly earnings rose 3.1% from year earlier. In addition, wages for production and non-supervisory workers rose 3.7% annually after a 3.8% gain that was the best since 2008.

“This endorses the Fed pause for sure. The market's saying the Fed's pause is warranted,” Subadra Rajappa, Societe Generale's head of U.S. rates strategy, said on Bloomberg Television.

--With assistance from Steve Matthews and Matthew Boesler.

To contact the reporter on this story: Alister Bull in Washington at abull7@bloomberg.net

To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Ana Monteiro

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