Fed has one more reason to delay rate rise as hiring slumps

Fed Chair Janet Yellen and her colleagues last month opened the door to an increase as soon as June, while also suggesting in forecasts that September may be a more likely time. 

PHOTO: REUTERS

4 Apr9:22 AM

[WASHINGTON] A hiccup in the jobs data may give Federal Reserve officials pause as they ponder the right time for a liftoff.

Employers in the US added 126,000 workers in March, the fewest since December 2013, Labour Department data showed on Friday. Revisions to prior months disappointed as well, subtracting 69,000 jobs from the previous counts for January and February.

The Fed is watching for the economy to reach or approach full employment and generate higher inflation before raising interest rates from near zero. Fed Chair Janet Yellen and her colleagues last month opened the door to an increase as soon as June, while also suggesting in forecasts that September may be a more likely time.

Richmond Fed President Jeffrey Lacker said on Friday in a statement to Bloomberg that the report doesn't alter his view on policy. Lacker, who votes on policy this year, said in a March 31 speech that the case for raising rates will remain "strong" at the June meeting unless economic reports diverge "substantially" from projections.

"The payroll report was a bit disappointing, but this followed a fairly long run of strong reports," Mr Lacker said. "By itself, this doesn't meaningfully change my economic outlook or my policy assessment."

WINTER WEATHER

The jobs figures followed a spate of data showing the economy cooled in the first quarter as the oil patch weakened, bad winter weather limited consumer spending and the strong dollar hurt the nation's manufacturers. The gain in March payrolls snapped 12 straight months of 200,000-plus monthly gains, the longest such stretch since 1995.

"This single report will not necessarily result in the Fed changing tack on its view of policy tightening this year," Millan Mulraine, a research strategist at TD Securities USA LLC in New York, wrote in a note after the report. "What it will do is weaken the argument for a mid-year hike" and raise the stakes riding on the next few reports, he said.

The odds of a June liftoff implied by federal funds futures fell to 11 per cent after the report from 18 per cent Thursday. The implied probability of a September rate rise also slumped after the release, dropping to 35 per cent from 39 percent as of 12.15pm New York time Friday.

Options on eurodollar futures imply traders see only a 47 per cent chance the Fed will raise rates this year and just a 55 per cent chance of an increase by March 2016. The central bank has kept its main rate near zero since December 2008.

UPBEAT OUTLOOK

Even with the softer jobs numbers, employment opportunities are keeping Americans upbeat, laying the ground for a rebound in spending. The unemployment rate held at 5.5 per cent, the lowest level since May 2008, and worker earnings improved, the report also showed.

Hourly pay was a silver lining, rising by 0.3 per cent from the prior month and 2.1 per cent from a year earlier and in line with the average since the expansion began in June 2009.

Goods producers, including factories, builders and oil and gas support companies, cut jobs last month. Manufacturing payrolls dropped for the first time since July 2013 and the employment gain in the restaurant industry was the weakest since June 2012.

Payrolls in mining and logging, which include oilfield services, declined by 11,000 after a similar drop in February.

Over the past three months, employment has fallen by 29,000 in those fields, the worst since a similar period ended in July 2009. Crude prices have slumped 54 per cent since a June 2014 high.

RECOVERY DENTED

"We've taken a bit of a dent in the recovery," said Ethan Harris, co-head of global economics research at Bank of America Corp in New York, and a former Fed analyst.

At the same time, "the broader economy is not as weak as the recent numbers have suggested, and we expect wage pickup going forward. We think there's going to be enough improvement that the Fed can tick the wage box, tick the labour market box, and raise rates sometime later in the year." Mulraine of TD Securities maintained his projection for an increase in September, though he said the "balance of risks" is shifting to a later start.

Policy makers will get two more employment reports before their meeting on June 16-17, when they will also release new economic and interest-rate forecasts.

FOMC PROJECTIONS

Fed officials in March lowered their median estimate for the main rate at the end of 2015 to 0.625 percent, compared with 1.125 percent in December forecasts. The estimate for the end of 2016 fell to 1.875 percent from 2.5 percent, according to the Federal Open Market Committee's quarterly Summary of Economic Projections.

The weak payrolls number could cause FOMC members to turn increased attention to jobs data and away from inflation "at the margin," said Ray Stone, managing director at Stone & McCarthy Research Associates in Princeton, New Jersey.

He said they'll have to see if the US returns to its strong job-adding streak. "Even though we had a downshifting here, I think the FOMC has to be pretty satisfied with the broader trends in employment." The jobless rate held at a six-year low of 5.5 per cent in March, near the level policy makers estimate for what constitutes full employment. Most project it is equivalent to a 5 per cent to 5.2 per cent unemployment rate, down in March from the 5.2 per cent to 5.5 per cent range they had in December.

TREASURY'S DYNAN

The weaker payrolls reading doesn't alter the outlook for the economy, according to Karen Dynan, the Treasury Department's chief economist and a former top researcher at the Fed board during a 17-year career there.

"Domestic fundamentals look strong" and the U.S. is poised for above-trend growth in 2015, Ms Dynan said in an interview in Washington following remarks at a Fed conference.

The economy expanded at a 2.2 per cent annualized pace in the fourth quarter. Gross domestic product probably rose at a 1.5 per cent annualized pace in the first quarter, according to the median estimate in a Bloomberg survey of economists from March 30 to April 1.

Billionaire investor Bill Gross said the disappointing jobs report won't dissuade the Fed from raising interest rates by September. "They want to get off zero, if only to prove that they don't have to stay at zero for a long, long time," Mr Gross, who runs the US$1.5 billion Janus Global Unconstrained Bond Fund, said in a Bloomberg Television interview on Friday.

Ms Yellen said last week interest rates will probably be raised in 2015 and made the case for a cautious approach to subsequent increases. Speaking in San Francisco, Ms Yellen cited strong gains in the labour market as a sign that restraints on the economy are abating.

The payrolls report "will give the Fed less confidence that the economy is ready to endure the policy liftoff as early as June," Bloomberg economist Carl Riccadonna and his colleagues wrote after the release.

Robert Brusca, president of Fact & Opinion Economics in New York, agreed. "I don't understand how, with the economy this weak, the Fed can even talk about raising interest rates," he said.

BLOOMBERG