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Federal Reserve is paying close attention to the unemployment number, here's why

Yahoo Finance's Brian Cheung joins The First Trade with Alexis Christoforous and Brian Sozzi to discuss the August jobs report and why the Federal Reserve is keeping a close eye on the monthly report.

Video Transcript

ALEXIS CHRISTOFOROUS: So what does this jobs report mean for the Fed? Let's bring in our Fed correspondent, Brian Cheung. So Brian, do you think this changes the equation at all? Might the Fed start to pull back a little bit, pull in the reins on its stimulus?

BRIAN CHEUNG: Well, that would certainly be the suggestion just based off of the headline numbers. Obviously, this report having beat expectations on both the non-farm payroll number in addition to the unemployment rate. The unemployment rate is something that the Federal Reserve has really been paying attention to. They wanted to see how rigorously people could get back to work on the other side of this COVID-19 crisis. And beating the street's estimates for where unemployment would be for the month of August certainly does suggest maybe the Federal Reserve's position well and better than they perhaps thought it headed into this month.

So the Federal Reserve has said that they have a lot of tools on the table. Obviously, forward guidance would be the next big step for the Federal Reserve. This would look like something like the Fed saying we're not going to raise rates until the unemployment and/or the inflation rate hits a certain target, but there was a lot of wavering commitment based on Fed speak recently about when the Fed might deliver that type of forward guidance. Some people were saying well, we would hope that it might come as early as September. But if things look better, maybe they hold back on that.

So that would certainly be the suggestion based off of this a pretty positive jobs report today that maybe the Federal Reserve could continue to use forward guidance but might not do that until somewhere down the line. Now, however, the Federal Reserve will eventually have to act at some point, because the jobs report wasn't all necessarily Goo. When you look at permanent job losses, for example, during the month of August, over half a million new people now classified as having permanently lost their jobs. These might be people who previously had only been furloughed and only expected to be sidelined temporarily.

And then there's also the concern about the K shape recovery. That yes, certain types of people might be going back to work, but it's not even across the distribution. One example being across race and ethnicity. The white unemployment rate is at 7.3%, but Black, Asian, and Hispanic unemployment remain above double digits. The Black unemployment rate 13% for April. That's almost more than double the unemployment rate for whites, again, at 7.3%. So is worth noting that this idea of a K shaped recovery could be something the Federal Reserve might have to address somewhere down the line.