Jobs report may tip the Fed's hand

Friday's jobs report could very well be a tipping point in determining the timing of the Federal Reserve's first rate hike.

Chicago Federal Reserve President Charles Evans warned that if job growth fell below 200,000 new positions added, it would be unwise for the Fed to raise interest rates anytime this year.

Janet Yellen speaks in Washington March 18, 2015.
Joshua Roberts | Reuters
Janet Yellen speaks in Washington March 18, 2015.

Indeed, Evans, who is among the most dovish Fed members, says almost under any circumstances, a rate hike this year would be premature.

The Fed's dual mandate targets have yet to be hit: Unemployment needs to fall to between 5 percent and 5.2 percent and inflation needs to reach or exceed 2 percent for some period of time. Job growth has to exceed 200,000 per month in order for the Fed to see the most narrow measure of unemployment, the so-called U3 rate, fall to 5 percent.

A colleague sent me this handy dandy calculator that shows it will take nine months to reach a 5-percent handle if job growth slips to just above 193,000 jobs added:

In March, the economy added a disappointing 126,000 jobs. Expectations are that 220,000 jobs were created in April, with the range of expectations from 180,000 to 335,000 jobs added.

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Of late, job growth has averaged about 197,000 per month, still shy of an accelerating rate of job gains. Hence, at that rate of job growth, it would be January of 2016 before the Fed meets its employment threshold and could justify its first rate hike.

Some of the more "hawkish" Fed members have pointed out that wage gains have begun to accelerate, suggesting that labor market slack is diminishing more quickly that those who look at broad, underemployment, data would admit.

It's a bit of a coin toss at the moment as to whether an acceleration in job gains is on the horizon, as the energy patch is cutting a hundred thousand jobs and manufacturing data have been sluggish of late.

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The Fed's other mandate, inflation, on the other hand, has begun to creep higher, largely thanks to the recent, and sharp, spoke in oil prices. The run-up in oil and gasoline will, no doubt, push headline inflation higher in coming months, though it is rising from a base that remains below the Fed's 2-percent target.

Inflation "break-evens," as measured by the spread between inflation-protected bonds and regular Treasury bonds have been rising lately, coming close to the Fed's 2-percent target, indicating that the bond market believes inflation may be bottoming out.

We are seeing that reflected, also, in the recent rise in 10-year note yields, taking the yield to nearly 2.15 percent, the highest level we have seen in months. So, too, European interest rates, particularly in Germany, have risen sharply lately, suggesting that the deflation scare on the Continent may have passed.

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All that said, the unemployment report may still be the biggest "tell" when it comes to the Fed's move to normalize interest rate policy. If the current "soft patch" extends beyond the first quarter, and is confirmed by Friday's labor market report, Evans may be right and the first rate hike gets pushed to 2016. If employment gains blow the door off expectations, then that first rate hike will come sooner, rather than later, but it's gonna have to be a really big number!

Commentary by Ron Insana, a CNBC and MSNBC contributor and the author of four books on Wall Street. He also editor of "Insana's Market Intellgence," available at Follow him on Twitter @rinsana.