Poor jobs report likely to keep rate increase at bay

Federal Reserve chairman Janet Yellen said in late May that an interest-rate increase probably will be appropriate “in the coming months” if the economy and job market continue to show steady improvement.
Author:
Publish date:

Federal Reserve chairman Janet Yellen said in late May that an interest-rate increase probably will be appropriate “in the coming months” if the economy and job market continue to show steady improvement.

The Fed’s rate-setting Federal Open Market Committee will meet next week, but it now appears highly unlikely that the central bank will act this month. The Labor Department said Friday that the economy created just 38,000 jobs in May, the fewest in any month in five and a half years.

Employment in construction and manufacturing fell steeply, and employers hired 59,000 fewer people in March and April than the government previously announced.

On Monday, Yellen said once again that she believes gradual interest-rate increases will be the proper policy, but she did not talk about the timing, Bloomberg reported.

“I continue to think that the federal funds rate will probably need to rise gradually over time to ensure price stability and maximum sustainable employment in the longer run,” Yellen said during a speech in Philadelphia.

She was careful to avoid the phrase “coming months.”

“She did not address the timing of the Fed’s next gradual move, which suggests to us that she is in no hurry,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd., told Bloomberg, arguing that her comments on the payroll report “largely rules out a move in rates next week. July is not a strong bet, either.”

The employment numbers were “disappointing,” Yellen said, although she noted one encouraging aspect of the report: an increase in average hourly earnings.

We will hear from her again at next week’s Fed policy meeting and when she testifies before the Senate Banking Committee on June 21 and the House Financial Services Committee on June 22, giving her semiannual monetary policy report.

The jobs report stands in sharp contrast to other data on housing and consumer spending — if not sentiment — that have led economy watchers to believe growth is accelerating.

How could May’s job gains be so minuscule?

Reuters reported that some economists are saying the sharp drop was payback after unseasonably warm weather boosted hiring in February and March. The economists saw the weak payroll numbers as a delayed response to weak first-quarter growth.

“Employment sometimes lags economic activity, which means the weakening trend in the first five months of this year may simply reflect the sharp slowdown in the economy in the first quarter, exacerbated in April and May by a shift of some seasonal hiring,” Chris Low, chief economist at FTN Financial in New York, told Reuters.

Reuters further reported that one regional Fed chief — staying the Fed’s recent course — said the June jobs report has not altered the overall trajectory of the economy or her thinking on interest rates. Cleveland Fed president Loretta Mester said Saturday in Sweden that gradual rate increases remain appropriate.

"The timing of actually when the rate hikes would occur and the slope of that gradual path is data-dependent," she said, adding, "You can't read too much into one number, but it is certainly part of the data that will be taken into account as we go into the June FOMC meeting and for the rest of the year.”

Apart from the jobs data, most of the economic reports last week were upbeat. Consumer spending had its largest gain in nearly seven years in April, beating Wall Street expectations, and personal income rose by 0.4 percent during the month for the third time in the first four months this year.

Business Insider said said car and light-truck sales for May rose more than expected, even though some automakers reported significant declines. Autodata said sales rose at a seasonally adjusted annual rate of 17.45 million, higher than Bloomberg’s consensus forecast of 17.4 million.

Chrysler was the only one of the Big Three automakers to report a positive sales month, but Business Insider said sales are not that much lower than the record of 17.5 million new cars and trucks sold from dealer lots.

The Conference Board’s Consumer Confidence Index disappointingly fell to 92.6, its lowest level since November, from 94.7 in April, which also represented a decline. MarketWatch said rising gasoline prices might be a factor.

“Consumers remain cautious about the outlook for business and labor market conditions. Thus, they continue to expect little change in economic activity in the months ahead,” Lynn Franco, director of economic indicators at the Conference Board, said in a statement.

There aren’t many economic reports scheduled this week. The consumer credit data for April will be released this afternoon and the University of Michigan’s preliminary consumer sentiment index for June will be out on Friday.

It will be worth watching to see whether the university’s report mirrors the Conference Board’s downbeat result.

Related