How Janet Yellen can cure the “two steps forward, one step back” recovery

You don’t want to read too much into a single monthly jobs report, but there’s no denying that the latest news from the Bureau of Labor Statistics was disappointing. Employers added a meager 126,000 jobs, and the previous two months’ worth of reports got downward revisions. It’s not time to panic yet, but one lesson from the weak month ought to be that talk of an early interest-rate hike from the Federal Reserve is misguided and that the palpable desire of some stakeholders to raise rates at the first sign of bad news is itself a source of trouble.

The construction sector took a notable turn for the worse, as developers apparently slowed their interest in new projects.

Meanwhile, the surging value of the dollar relative to other major world currencies weighed on the manufacturing sector.

No one month is a sure thing. But the conjunction of a domestic construction slowdown with a currency-induced manufacturing slowdown is a telltale sign of tight monetary conditions. And until the Fed clarifies its messaging around the relationship between economic recovery and higher interest rates, we are going to be stuck on this see-saw where every multi-month run of good news is swiftly followed by a fallback.

Elite thirst for a rate hike essentially guarantees that any decent economic run will lead to an immediate runup in the price of the dollar and plentiful concern about medium-term interest rates. Those, in turn, will lead to a joint slowdown in manufacturing and construction. That will pull the recovery back down to earth, and push the timing of the first Fed rate hike out further.

To achieve liftoff, the Fed needs to say that it wants liftoff.

And that after a multi-year run of inflation below its 2 percent target rate, it is prepared to keep interest rates low until there is clear and compelling evidence of an inflation problem. That will let investors know that good news is simply good news, and there’s no need for every two steps forward to be followed by one step back.