NEW YORK (CNN/Money) -
The February job report will be front and center for investors and economists Friday, but the question is how much will Fed policy-makers care about it?
The employment report normally is seen as a predictor of future rate-hike decisions by the Federal Reserve.
The central bank started raising its target for a key short-term interest rate last June, after three straight months of strong payroll growth suggested that employers were ready to start hiring in earnest again.
But that hiring boom quickly went bust, as every jobs report since, save one, has been modest at best, often coming in well below economists' forecasts.
Even so, the Fed has continued to tighten. The reason is that the cost of money and inflation, rather than employment, are now the keys to the Fed's decision making process.
"A number of participants noted continued modest gains in employment, though some commented that, based on anecdotal information, job growth seemed to have picked up of late," said the minutes of the most recent meeting of the Federal Open Market Committee Feb. 2.
Still, the employment report is expected to move stock and bond markets after it comes out at 8:30 a.m. ET.
On average, forecasts are for a growth of 225,000 jobs in U.S. payrolls, up from 146,000 in January, with the unemployment rate remaining at 5.2 percent.
Some have suggested, however, that the market's expectations of a strong report have risen so high that even a report matching those consensus forecasts could send bond yields lower. Another weaker-than-expected report could cause a plunge in yields, because it would imply that the Fed may pause in its pace of rate hikes.
On the upside, a blowout number of 300,000 new jobs or more could send bond yields soaring. That would raise hopes that the Fed might accelerate from its "measured pace" of quarter-percentage point rate hikes.
Regardless of what tomorrow's report ultimately shows, however, many economists say investors are giving too much attention to it.
"The current focus going into the employment report this week has much more to do with habit than anything based in reality," said Drew Matus, senior economist with Lehman Brothers.
Matus says that one month's employment report is unlikely to mean much to the Fed decision makers. Even a few months of strong job gains won't necessarily mean faster rate hikes.
"The Federal Open Market Committee does not appear from any of its official statements or from the speeches and testimony of its members, to be concerned about excessively strong labor markets or the prospect of wage inflation," said Tom Schlesinger, executive director of the Financial Markets Center.
"They are not using that possibility as a justification for their tightening campaign, in contrast to past years when there was a lot of concern about tightening labor market."
During testimony before House and Senate committees last month, several senators and representatives urged Greenspan to pause the Fed's rate hikes until employment shows more strength. The chairman essentially ignored those comments, suggesting in his remarks that modest jobs gains are no cause for concern.
The markets are becoming more sensitive to inflation readings, too. In recent weeks, investors have reacted strongly to bits of news about wholesale prices and the cost of imports.
Still, there are many contradictory readings on inflationary pressures in the economy.
The monthly employment report, on the other hand, is a relatively clean reading on the strength of the labor market, according to economists.
Coupled with a broad general public interest in the strength of the labor market, that means the jobs report will keep getting attention on Wall Street, even if inflation signals are more important to watch.
"At a basic and obvious level, it ties into gut level concern of ordinary people," said Schlesinger.
Certain parts of the jobs report, including average wages, will be closely watched for signs that a tightening labor market is leading to inflationary pressures. But those wage gains have been as modest as overall payroll increases since last May's report.
In the January jobs report, for example, average hourly wages were up 2.6 percent over the previous 12 months, while average weekly pay is up 2.3 percent. Both are close to the 2.3 percent rise in consumer prices over the same period, a level not considered a threat to price stability.
"I don't think there's much doubt the Fed will raise rates by a quarter point each of the next three meetings. Even a really strong report probably won't cause them to raise rates by a half-point," said Mark Vitner, senior economist with Wachovia Securities.
While the Fed is more focused on inflation than employment these days, its members will be on the watch for signs that a tighter labor market could be leading to a increase in income down the road.
"If you wait for the wage increases to show up in the report, they're behind the curve," said Vitner.
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