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Forget claims drop, the jobs market still stinks

Thursday marked another day and another data point that at least on its face showed the Federal Reserve has plenty of incentive to start raising interest rates.

Weekly jobless claims tumbled to 289,000 for the period ending Aug. 2. More importantly, the four-week moving average, which smooths out volatility in the data, fell to 293,500, the lowest level since late-February 2006.

Back then, the Fed's targeted funds rate stood at a robust 6 percent. Today, the rate is set between 0 and 0.25 percent.

So isn't it past time for the central bank to get on the stick and start setting a rate that is more in line with economic reality, particularly that being expressed in the jobs market?

Not really, at least in the eyes of Chair Janet Yellen and the solid consensus she commands on the Open Market Committee, which sets the policy rate.

Job seekers fill out applications before the start of the HireLive career fair in San Francisco.
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Job seekers fill out applications before the start of the HireLive career fair in San Francisco.

Read MoreUS jobless claims slide to near lowest of 2014

In their eyes, much needs to be done in an economy that grew at least 4 percent in the second quarter, where a variety of inflation indicators are growing, and where nonfarm payroll growth has been more than 200,000 for six months running.

"Until that (job growth) translates into drawing down that pool of available labor, putting pressure on the wage-price spiral and providing more purchasing power from the consumer standpoint, I don't see the Fed having the motivation or the catalyst" to start raising rates, said Lindsey Piegza, chief economist at Sterne Agee,

Indeed, while many indicators would point to an improving labor market, there are plenty that show there's a ways to go.

Current job creation is trending toward temporary positions that are part-time and on the lower end of the wage scale, though July's report was a bit better in terms of quality, with full-time positions dominating.

Read MoreJob creation misses expectations, rate up to 6.2%

There are other differences as well.

In February 2006, nonfarm payrolls grew by 243,000 at a time when the economy was adding 175,000 jobs a month.

However, back then construction was growing almost as quickly as services, which have dominated for the past several years. Wage growth then was a healthy 3.5 percent annualized; now it barely registers at 2 percent.

The Fed was in an entirely different place as well, with no monthly bond-buying program in place and interest rates at a level they likely won't reach for years.

It all adds up to not a very glamorous economy in the present day, nor much of an endorsement for the efficacy of current monetary policy, which also is getting no help from fiscal policy.

Read MoreFed 'behind the curve'—right where it wants to be

"The traditional monetary policy measures that normally get the economy back on track are not working," Piegza said. "This even further justifies the argument that this is not the traditional economy."

Amid that backdrop, the Fed has changed its stance several times on what would trigger an interest rate increase. The initial posture from the FOMC was that a 6.5 percent unemployment rate and 2 percent inflation rate would serve as a collective catalyst. However, since the jobless rate has dropped below that level the Fed has switched to more "qualitative" and consequently more nebulous indicators for when it will move.

In such a slow-growth employment scenario, raising rates might be considered anathema, especially to those, like stock market investors and the companies that have seen their prices soar, who have benefited the most from the low-rate money-printing environment.

However, Piegza and others argue that a modest rate hike might at least be a confidence booster that the general picture is of an improved economy that can withstand small increases now instead of sharp jumps later when inflation picks up and the full employment picture improves.

"It's almost a self-fulling prophecy," she said. "If the Fed did say the economy's growing, we expect the economy to continue to grow, and we're going to rate interest rates not to the moon but maybe 100 basis points over a six-month period, that might be enough to stimulate confidence in the market, to get that business cycle growing."

By CNBC's Jeff Cox

Wall Street