Hilsenrath: NFP Jobs Shortfall Makes June Rate Rise Less Likely, but July on the Table

Friday’s Non-Farm Payroll jobs report undermines the notion that labor market conditions are strengthening, which makes it much less likely the Federal Reserve will raise short-term interest rates later this month.

Analysts and investors quickly concluded Fed officials will hold rates steady when they meet June 14-15, especially since the central bank also has concerns related to the June 23 U.K. vote on whether to remain in the European Union.

“Job growth has visibly weakened over the last two months and will give the

[Fed] some pause as [officials] consider another rate hike over the next few meetings,” Scott Anderson, chief economist at Bank of the West, said in a note to clients after the Labor Department’s report was released

Fed officials decided at their April policy meeting that “if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the [Fed’s] 2 percent objective” then they could be comfortable raising short-term interest rates in June, according to minutes of the gathering.

In testimony before Congress’s Joint Economic Committee in December, Fed Chairwoman Janet Yellen said the economy needed to produce fewer than 100,000 jobs a month to absorb new entrants into the labor force. In other words, the bar wasn’t terribly high for a rate increase this summer.

However, payroll gains of 38,000 in May were well below Ms. Yellen’s mark, even accounting for a temporary Verizon strike that sidelined 31,500 workers. Given her cautious approach, and the Fed’s clear desire to be patient in its actions, officials have very little incentive to move now.

Other details of the report will raise questions for Fed officials. The breadth of job gains was disappointing. The Labor Department revised down its estimates of earlier months’ hiring; 51% of industries expanded payrolls in May, compared with 56% in March; average hourly earnings were up 2.5% in May, better than the 2% wage gains seen earlier in the recovery, but little changed from recent months and thus little evidence that wage pressures are building.

This doesn’t take a summer rate increase off the table. Payroll gains have averaged 116,000 a month over the past three months, enough to meet Ms. Yellen’s modest mark. A strong June report or upward revisions to previous months could convince officials that the latest soft patch was temporary. The jobless rate fell to 4.7% in May, which is where officials expect to see it by year-end. That was primarily because of people dropping out of the labour force, more disappointing news for Fed officials. However, it remains evidence that labor market slack is diminishing, a development officials can’t ignore if it continues.

Taken altogether the employment report gives Fed officials reasons to wait until July and look at another jobs report and broader output data to see whether the recent slowdown is temporary before they consider raising rates.

Fed officials have held their benchmark federal-funds rate in a range between 0.25% and 0.50% since December, when they lifted it from near zero. They indicated then they expected to raise the rate a full percentage point this year, but halved that estimate in March. Several officials have said recently they expect to lift the rate two or three times this year in quarter-point steps if the economy strengthens as they forecast.

Ms. Yellen is scheduled to deliver a speech Monday in Philadelphia, in which she can clarify her latest thinking on the economy and the likely path of short-term rates.

She also will have the challenge of forging consensus among Fed officials on the message to send from their meeting this month. In light of such a soft employment report, it will be harder to signal when the next rate increase will happen. Some officials might still want to move in July, but few can say that with much conviction unless they see stronger economic data.

Source: Nasdaq / WSJ / John Hilsenrath

 

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