Weak job growth won’t stop Fed rate hikes
new york — Employment growth may be slowing, potentially signalling a rising risk of a recession, but the Federal Reserve has tactical reasons to forge ahead with interest rate rises.
That’s because the Fed, with interest rates at still very low levels, faces asymmetric pressure to get more room between current rates and the zero lower bound, basis points which can serve as ammunition when and if a downturn materialises.
Job creation slowed in the US last month to 138,000, more than 20 per cent below the 12-month average and well below expectations. Revisions trimmed 66,000 from the previous two months’ totals, taking the three-month average to 121,000, down a third from its former pace.
Blips like this are not unknown in ongoing expansions, and it is too early to get alarmed over a near-term downturn. Even though flagging job creation would remove the single leg of the Fed’s one-legged justification for tightening, don’t expect the US central bank to be quick to back away from its expected two rates hikes this year, one of them on June 14.
Yet if the long-running US expansion was heading towards a recession, this is about how it would begin.
Slower employment growth always begs the question of recession risks. In our view, employment growth is one of the stronger recessionary indicators, and slower employment growth is something we always take seriously. In past cycles, slower employment growth (relative to the recoverylevel average) has preceded recessions by nine to 12 months, and
I see some tension between signs that the economy is in the neighbourhood of full employment and indications that the tentative progress we had seen on inflation may be slowing Lael Brainard, Federal Reserve governor
we would take it as a negative signal should employment growth continue to soften, Barclays economist Michael Gapen wrote to clients after the data.
This could be seasonal effects, or the ebbing of what Gapen calls “post-election euphoria”.
The data offered nothing by way of assurance that inflation will pick up soon, with average hourly earnings up just 2.5 per cent year on year despite the lowest unemployment in 17 years. By the Fed’s preferred measure, inflation is just 1.7 per cent, and heading in the wrong direction away from the two per cent target.
If the job creation trend continues downward and inflation simply remains where it is, the Fed would normally respond by signalling a willingness to slow its expected pace of increases. If inflation isn’t rising sufficiently and jobs are only being created at slightly more than the rate needed to keep pace with population growth, then the justification for carrying on with rate rises past June, much less beginning to trim the balance sheet, looks shaky.
The unemployment rate fell this month mostly because the labour force shrank.
Fed governor Lael Brainard acknowledged the contrast. “I see some tension between signs that the economy is in the neighbourhood of full employment and indications that the tentative progress we had seen on inflation may be slowing,” Brainard said. “If the tension between the progress on employment and the lack of progress on inflation persists, it may lead me to reassess the expected path of the federal funds rate in the future. It is premature to make that call today.” —