RPT-ROI-Fed's 'lighthouse' may not allow it to dock: Mike Dolan

By Mike Dolan

LONDON, Nov 20 (Reuters) - Even when the Federal Reserve's lighthouse beam returns, it may still find itself all at sea - leaving interest rate cuts on ice for some time.

In a speech this week just ahead of the first comprehensive U.S. employment report in more than two months, Richmond Fed boss Thomas Barkin used the analogy of a ship unable to dock in the dark to explain the impact of the data outage that accompanied the record 43-day government shutdown.

"When the lighthouse goes dark, you might remain on your preexisting path at first - but soon enough, you will want to throttle back until you get more visibility," Barkin said on Wednesday. "That's not a particularly comfortable place to be, so I am looking forward to some illumination."

Financial markets will pore over the details of the long-awaited September payrolls update due on Thursday, but the numbers are already too stale to brighten things up much for a forward-looking central bank.

For the record, the consensus forecast is for a 50,000 increase in jobs during the month and an unchanged unemployment rate of 4.3%.

But any market impact will likely be fleeting because we now won't get any October readout due to data collection issues during the shutdown and it will be at least another fortnight before November's report is due.

Unfortunately for the Fed, it has left itself hostage to labor market numbers that are fiendishly difficult to read right now - and likely for the years ahead too.

Of its two main guiding mandates, the inflation equation is reasonably clear right now.

Headline consumer price inflation and 'core' measures of the Fed's favored 'personal consumption expenditures' basket are up to a percentage point above target. What's more, they've been moving in the wrong direction, are not expected to return to the 2% over the coming year and may be aggravated by tariff rises.

The Fed's rationale for resuming rate cuts over the last two meetings was primarily the loss of momentum in the labor market and a desire to get back to a more 'neutral' policy setting.

The cuts were certainly not due to concerns about prevailing GDP growth, which the data-starved Atlanta Fed model still reckons is tracking at an annualized rate of 4.2%. And it's not about tight financial conditions, which are the loosest in almost three years based on the Chicago Fed's measure.

So the recent soundings from Fed hawks and centrists about a pause in the easing cycle, which have pushed the futures market to drop the chance of another rate cut next month to less than 50%, have dwelled on the fact that it's not even clear the labor market is that weak.

Not to belabor Barkin's analogy, but there's been some moonlight while the lighthouse has been down. Dissecting the runes of other labor market data from the private sector or individual states has become a cottage industry of its own in recent weeks.

On that score, there are few signs of major new weakness.

UNMOORED?

High-profile company layoffs and the government outage itself had led many to suspect at least a temporary blip in the labor market over the past six weeks. But new jobless claims have been stable, and there's little sign that the still tight 4.3% unemployment rate is moving higher.

And with immigration having ground to a halt and more 'baby boomers' retiring, a September payroll gain of 50,000 would be above what many economists now assume is the 'breakeven' rate that keeps the jobless rate unchanged.

Indeed, Barkin on Tuesday flagged this "rapid drop" in labor supply, noting that forecasted annual workforce growth of just 0.3% over the next decade is almost a third of the rate of the past 10 years.

"There may be fewer jobs to fill, but there are also fewer people vying for each job," he said, adding later that workforce growth could well be headed for zero, with the possibility of more jobs than workers in the future and requiring a lift in productivity growth just to keep economic growth positive.

Digging into what's happening with job openings and the so-called 'quits' rate of worker resignations, Richmond Fed economists this week said there were still few clear signs that the labor market was anything but tight.

And so the Fed finds itself in a guessing game over difficult-to-measure job signals, fuzzy productivity math and uncertainty about the impact of artificial intelligence - all while the economy continues to appear robust and inflation remains hot.

The Fed may be happy the lights are back on. But everything still looks murky.

The opinions expressed here are those of the author, a columnist for Reuters

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