Fed Needs Sustained Job Gains Before It Will Raise Rates

Photographer: Jin Lee/Bloomberg

A shopper holds Macy's bags while walking past the department store in New York this month. Close

A shopper holds Macy's bags while walking past the department store in New York this month.

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Photographer: Jin Lee/Bloomberg

A shopper holds Macy's bags while walking past the department store in New York this month.

Federal Reserve officials signaled they’ll need to see more evidence of sustained gains in the job market before ending their pledge to keep the benchmark lending rate at a record low for an “extended period.”

Policy makers said yesterday that while the labor market is “beginning to improve,” employers remain reluctant to hire, and consumer spending is restrained by tight credit and limited wage gains. Inflation will remain “subdued for some time,” they said in a statement after a two-day meeting in Washington.

Chairman Ben S. Bernanke and his colleagues aren’t in a hurry to withdraw stimulus with 15 million Americans unemployed, even as economic growth outpaces analysts’ forecasts. Slack labor markets have pushed inflation lower, allowing the Fed to keep its zero interest-rate policy in place to encourage businesses and households to borrow and spend.

“You need the economy hitting a critical speed in the Fed’s mind, have enough momentum behind it to be able to withstand the first moves to renormalize monetary policy,” said John Ryding, a former Fed researcher who is now chief economist and founder of RDQ Economics LLC. Fed officials need to see “a few months of pretty solid private-sector job creation before they will tinker with the extended-period language.”

The FOMC left the main interest rate in a range of zero to 0.25 percent, where it has been since December 2008. Kansas City Fed Bank President Thomas M. Hoenig dissented from the statement for the third meeting in a row, saying the Fed’s promise of low rates was no longer warranted and may “increase risks to longer-run macroeconomic and financial stability.”

Stocks Rose

Treasury notes fell and stocks rose after the decision. The Standard & Poor’s 500 Index gained 0.7 percent to close at 1,191.36 in New York. Two-year Treasury notes fell, pushing up the yield two basis points to 1.02 percent. A basis point is 0.01 percentage point.

The unemployment rate, which hit a 26-year high of 10.1 percent in October, is forecast to remain at 9.7 percent in April for the fourth straight month in a May 7 Labor Department report, according to the median estimate in a Bloomberg survey.

Economists in the Bloomberg survey forecast employers will add 175,000 jobs in April, following a gain of 162,000 workers in March. The economy has not added jobs in two consecutive months since November and December 2007, the month the recession started.

Raised Forecasts

Economists have raised growth forecasts from earlier this month as reports showed consumer spending climbed, inventories rose and businesses invested in new equipment. Gross domestic product grew at a 3.3 percent annual pace in the first quarter, according to the median forecast of economists surveyed by Bloomberg News ahead of a report tomorrow from the Commerce Department.

The central bank said household spending has “picked up recently.” The panel said last month that household spending was “expanding at a moderate rate.”

Retail sales increased 1.6 percent last month, more than anticipated and the biggest gain in four months, according to figures from the Commerce Department.

“I would have expected them to be a touch more enthusiastic on growth, just because the numbers have come in better,” Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, said in reference to policy makers.

In recent speeches and testimony, central bankers’ “rhetoric had been a little more open to some of the good news,” he said. “I wasn’t expecting to break out the champagne, but maybe a little bit more” optimistic.

Lower Labor Costs

The improving economy, demand from overseas and lower labor costs led a surge in corporate profits last quarter, according to results from Standard & Poor’s 500 companies that have reported earnings this month.

About 80 percent of S&P 500 companies to have posted first- quarter earnings have topped analysts’ projections, according to data compiled by Bloomberg.

Policy makers, in line with their mixed view on the economy, said in the statement that housing starts have “edged up but remain at a depressed level.”

The FOMC “upgraded to a lighter shade of gray,” said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh. The Fed needs to see more job growth, he said, and “the big picture is still not changed in terms of inflation, it’s still subdued for some time.”

Weakness in labor markets and resulting low wage pressures have held down consumer prices. The so-called core inflation rate, which excludes food and energy, was 1.1 percent for the 12 months ending March, down from 1.3 percent in February.

The Fed’s preferred gauge of inflation, the core personal consumption expenditures price index, will increase at an 0.5 percent annual rate in the first three months of 2010, according to a Bloomberg survey. That would be the smallest quarterly gain in records dating back to 1959.

“The inflation numbers just look incredibly tranquil,” said former Fed Governor Lyle Gramley, a senior economic adviser at Potomac Research Group in Washington.

To contact the reporter on this story: Scott Lanman in Washington at slanman@bloomberg.net; Joshua Zumbrun in Washington at jzumbrun@bloomberg.net

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