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Weak May jobs growth raises doubts about how much Fed can raise interest rates this year

By dailymail / Published on Saturday, 10 Jun 2017 19:10 PM / No Comments

“It begs the question, is this a reflection of tightness in the labor market, a natural decline? … Is this a sign of a slower economy, or tightening labor market?” said Sanchez. He pointed to the steady declines in the unemployment rate, down 0.5 percentage point this year, and the drop to a 2007 low of 8.4 percent in the U6 rate, reflecting the longer-term unemployed. Sanchez said that would argue that the labor market is reflecting signs of tightness, meaning employers are having a hard time finding employees to hire.

But the lack of traction in wage growth is a concern.”It still remains a mystery about why it’s not transferring to wages. The Fed can view this as a maybe tightening labor market but one that is not so tight it creates inflation pressure,” he said. That would argue for patience on the part of the Fed, he added.

“The markets haven’t changed their view that the Fed is on a near-term path. It’s still 90 percent for June in two weeks. The question is longer than that. There’s seems questions about whether they move in September. It might be moved out to December, but it’s too early,” said Sanchez.

The Fed has forecast two more rate increases for this year, after its March hike, and it has also spelled out how it may begin to shrink its balance sheet late in the year.

“We have a debt ceiling showdown. We have uncertainty around policy. I was not waiting for a September hike anyway. There could still be three rate hikes this year but the Fed needs to see a lot more wage acceleration,” said Diane Swonk, CEO of DS Economics.

Employment and inflation are dual mandates of the Fed. While labor data have been solid, the central bank has watched core inflation slip away from its 2 percent target to 1.5 percent, as measured by the PCE deflator.

“This is enough of a gain for the Fed, given how their threshold is 100,000 or less, but it’s going to be a tough one for the Fed and [rate-hiking path] going forward,” said Swonk. “The average since the beginning of the year is 181,000. It still is strong enough for a third rate hike.”

Swonk said the lack of wage growth is a puzzle. “They’re not paying out as much, as they say they have shortages. The increase in wages in the manufacturing sector are not reflecting the fact they have shortages,” she said.

“We’re hearing a lot of complaints about the shortages. It’s not being matched by wage acceleration,” she said, adding that there has been hope the job market would begin to look more like the economy of the 1990s. “The missing aspect is productivity growth. These are not skilled workers. Are firms going to bid for workers? Right now, it looks like they’re protecting their margins. We’re still waiting. It’s not over.”

The most hiring in May was in the area of professional and business services, with 38,000 new jobs. Health care added 24,000, while mining added 7,000. Part-time positions rose by 133,000.

Watch: Stocks higher despite jobs miss