What should the Fed make of the labour market?

The mixed messages in January's labour market report underline how hard it is for the financial markets to gauge exactly what the Fed means by its loosely defined pledge, to continue with its quantitative easing until the labour market outlook improves "substantially". Stock markets rallied after the report's release, believing that the recent pick-up in employment growth was positive, while the uptick in the unemployment rate meant that there was no danger of the Fed calling an early halt to its asset buying. We're not so sure it's as simple as that, however, particularly in light of the acceleration in average hourly earnings growth.