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What Can Investors Make of Latest Fed Meeting and January Labor Report?

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RANDY FREDERICK: Last week, the Fed left rates unchanged as expected, but the labor market sent us some mixed signals. Liz Ann Sonders, Schwab’s chief investment strategist, joins me for the February 7 Schwab Market Snapshot to discuss these two events and what they mean for the economy—but more importantly, what they mean for investors. Welcome back, Liz Ann.

LIZ ANN SONDERS: Thanks, Randy. And thanks for tuning in, everybody.

RANDY: So, Liz Ann, the Fed leaving rates unchanged was pretty much anticipated, but was there anything in the Fed statement that gave you any clues about the timing or the frequency of interest rates going forward?

LIZ ANN: No, I wouldn’t say there was anything concrete in this statement. I think afterwards it was viewed as a bit more of a dovish statement. And that’s, I think, why the probabilities based on the futures market for the likelihood of rate hikes at subsequent meetings dropped down a little bit from where they were in the past. I think probably more important will be the rash of FOMC speakers that we’ve got over the next week or so. Most recently it was actually a friend of mine, Pat Harker, who is head of the Philadelphia Fed, who did actually say that March was still on the table. Janet Yellen gives testimony in mid-February to Congress. We’ll get a sense whether she gives any guidance. So we may get a bit more color from those comments than we did in the statement itself.

RANDY: Well, now, I think many investors know that the Fed has two mandates: maximizing employment and controlling inflation. And where those two things intersect is in wages—and, of course, that’s where we’re getting the mixed signals. So what are your thoughts on the fact that we had a weaker- than-expected wage gain, but at the same time, a stronger-than-expected payroll gain?

LIZ ANN: Yeah, so average hourly earnings gets reported at the same time as the monthly Jobs Report. In this case, on a year-over-year basis, the latest month’s reading was actually only up 2½ versus 2.8 percent the prior month, so that is certainly a weaker reading. I would mention, though, that you get a lot of noise in this data, so I don’t yet think we could call it a signal.

It’s also important to remember that average hourly earnings is just that—it’s an average. And the job growth that we are seeing has been concentrated, interestingly, among younger people. They represent a bigger portion of the move back into the labor force, they make up a bigger portion of the move in terms of job creation, and obviously, they come into the job world at a lower wage. So when you’re taking an average and you bring lower wages into that average, that brings the average down.

There are some other measures of wages—one of which is put out by the Atlanta Fed—that is a median level of wages, so it only looks at workers that have been in their jobs for the full year, it takes away some of that mix shift. That’s showing wage growth of 3½ percent, so a full percentage point higher. So we do still think the labor market is tight and that, in general, the trajectory for wages is up.

RANDY: Well, that makes a lot of sense. Now, on a related note, aside from the employment gains, can you give us your outlook or just a broader perspective on the economy and how the economic data has been coming in lately relative to expectations?

LIZ ANN: So, in general, the economic data has been pretty good. You’re seeing it in things like the Citigroup Economic Surprise Index, which measures how data is coming in relative to expectations. But I think an interesting thing is happening recently that bears watching. And that’s the separation between what the soft data is telling us and the hard data is telling us. And what I mean by that is the soft data is considered things like confidence measures, survey data, and those are particularly strong. Whereas the hard data—the actual economic, hard economic releases—have not been quite as strong. So I think this increase in confidence, this increase in optimism based on surveys tells you that the expectation bar is set high. Now, that may mean there’s an opportunity, but I do think at some point, the hard data is going actually have to catch up to those more confidence- and survey-based measures.

RANDY: Thank you so much for your perspective, Liz Ann. Unfortunately, that’s all the time we have for today. If you want to read more from Liz Ann, you can do that in the Insights section of Schwab.com. You can follow Liz Ann on Twitter @LizAnnSonders. And, of course, you can always follow me on Twitter @RandyAFrederick. We’ll be back again. Until next time, invest wisely. Own your tomorrow.

Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. Please note that this content was created as of the specific date indicated and reflects the author’s views as of that date. It will be kept solely for historical purposes, and the author’s opinions may change, without notice, in reaction to shifting economic, market, business, and other conditions.

Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Supporting documentation for any claims or statistical information is available upon request.

Past performance is no guarantee of future results and the opinions presented cannot be viewed as an indicator of future performance.

The Citigroup Economic Surprise Index is an objective and quantitative measures of economic news. It is defined as weighted historical standard deviations of data surprises. A positive reading of the Economic Surprise Index suggests that economic releases have on balance beaten consensus. The index is calculated daily in a rolling three-month window.

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