Weak US employment report dims prospect of Fed rate hike

WASHINGTON (Reuters) — The US economy created the fewest number of jobs in more than 5-1/2-years in May as manufacturing and construction employment fell sharply, which could make it harder for the Federal Reserve to raise interest rates.

Nonfarm payrolls increased by only 38,000 jobs last month, the smallest gain since September 2010, the Labor department said on Friday. Employment gains were also restrained by a month-long strike by Verizon workers, which depressed information sector payrolls by 34,000 jobs.

Underscoring the report’s weakness, employers hired 59,000 fewer workers in March and April than previously reported. While the unemployment rate fell three-tenths of a percentage point to 4.7 percent in May, the lowest level since November 2007, that was because 458,000 Americans gave up the search for work.

“This is not a good report, and it may well give Fed officials second thoughts about increasing interest rates again this month or next, as some have suggested lately,” said Peter Ireland, an economics professor at Boston College.

The Fed has signaled its intention to raise rates soon if job gains continue and economic data remain consistent with a pickup in growth in the second quarter.

Fed chair Yellen said last week that a rate increase would probably be appropriate in the “coming months,” if those conditions were met. The US central bank hiked its benchmark overnight interest rate in December for the first time in nearly a decade.

The dollar tumbled against a basket of currencies on Friday and was on track for its largest one-day percentage loss in four months. US stocks also fell, while prices for US Treasuries rose.

Financial markets largely priced out a rate increase at the Fed’s June 14-15 policy meeting after Friday’s data, according to CME Group’s FedWatch program. The chance of an increase in July fell to 37 percent from about 59 percent late on Thursday.

Economists had forecast payrolls rising by 164,000 in May and the unemployment rate falling to 4.9 percent.