Photographer: Joshua Roberts/Bloomberg

Lukewarm Hiring Feeds Both Sides of Fed Debate on Sept. Move

  • Investors trim probability of September rate hike after data
  • Fed’s Lacker says payroll report was ‘reasonably strong’

For the Federal Reserve, September is proving to be the cruelest month.

A weaker-than-expected U.S. jobs report for August may slightly strengthen the hand of Fed officials who want to delay an interest-rate increase when they meet in a few weeks, though others may argue that cumulative gains warrant a move soon.

The debate, highlighted in minutes of the policy-setting Federal Open Market Committee’s July meeting, pits those expecting a natural slowdown in hiring as the U.S. economy nears full employment against those who see the recent cooling as a source for concern.

“If you wanted to move in September, you still want to move in September. If you wanted to wait, you still want to wait,” said Roberto Perli, a former Fed economist who is now a partner at Cornerstone Macro in Washington. Today’s report “may give marginally more ammunition to those guys who want to be more cautious,” he said.

Investors responded to the Labor Department report, which showed 151,000 workers were added to payrolls last month, by marking down the chances of rate increase at the FOMC’s Sept. 20-21 meeting to about one in five, according to the prices of federal funds futures contracts.

The average workweek for all workers decreased to 34.3 hours in August from 34.4 in July, marking the first drop in six months. That combined with a slower pace of job gains to reduce growth in total hours worked to 1.1 percent from a year ago, marking the smallest rate of increase in over six years.

A couple of FOMC voters noted at the July meeting that "some moderation in employment gains was to be expected" as the labor market neared their goals, according to the minutes. However, several others "noted that if that slowing turned out to be persistent, the case for increasing the target range for the federal funds rate in the near term would be less compelling."

Richmond Fed President Jeffrey Lacker, who dissented in favor of higher rates last year and warns of risks from delaying action for too long, said the report indicated that the labor market continued to tighten.

‘Reasonably Strong’

“I thought it was a fine report, perfectly close enough to expectations,” he told reporters after a speech Friday in Richmond. “I’d call it reasonably strong, given that it came in above a rate you would need to keep up with working-age population growth.” In his speech, Lacker said average monthly payroll gains this year were double the pace needed to prevent the unemployment rate from rising.

The drop in hours worked in August may be partly a result of a quirk in the seasonal-adjustment process, according to economist Raymond Stone, of Stone & McCarthy Research Associates in Princeton, New Jersey. Even so, weakness was broad-based across sectors, with the construction industry recording the largest decline in length of the average workweek.

“The hours data threw me a curve ball, because it was weaker than I would have guessed,” Stone said. “We were thinking the Fed’s going to tighten here in September, and that argument is less compelling after these data.”

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