Yellen’s Labor Market Gauges Point to Continued Fed StimulusJeff Kearns and Steve Matthews
Some of the job-market indicators watched by Federal Reserve Chair Janet Yellen are still flashing red even after today’s report showing the unemployment rate dropped to the lowest level in more than five years.
Average hourly earnings declined, while there were more people working part-time because they couldn’t find full-time jobs. The participation rate, which measures the proportion of working-age adults holding a job or looking for one, fell to match the lowest level since 1978.
Those were among the gauges Yellen cited as reasons the economy will need “extraordinary support” from the Fed for “some time to come” when she spoke March 31 in Chicago.
Today’s Labor Department report “does not in any way force the Fed’s hand from its accommodative stance,” said Lindsey Piegza, the Chicago-based chief economist for Sterne, Agee & Leach Inc. “This sets the Fed up for taking baby steps.”
Labor Department data today showed U.S. employers boosted payrolls in April by 288,000, the most since January 2012, while the jobless rate plunged to 6.3 percent, the lowest since September 2008.
“The report is good, but we’re still far from a normal labor market, and as long as inflation is contained there’s a lot more the Fed can do to help hasten the progress,” said Laura Rosner, a U.S. economist at BNP Paribas SA in New York and a former researcher at the Federal Reserve Bank of New York.
The jobless rate fell faster than Fed officials predicted. Most Federal Open Market Committee participants in March forecast the jobless rate would fall to 6.1 percent to 6.3 percent in the fourth quarter. The rate was 6.7 percent in both February and March.
In March, amid signs of continued labor-market weakness, the FOMC jettisoned its guidance that it would hold off on raising rates at least until the jobless rate fell below 6.5 percent. The committee instead said it would look at a “wide range of information,” including labor markets, inflation expectations and financial markets.
The Fed said this week it will keep paring the pace of bond buying as the economy shakes off the winter doldrums, putting the central bank on a course to end the unprecedented stimulus program by the close of 2014. It repeated that it’s likely to keep the benchmark interest rate close to zero for a “considerable time” after bond purchases end.
Mixed signals in the jobs report today suggest “little risk of the Fed tightening policy sooner rather than later,” said Brian Jacobsen, who helps oversee $241 billion as chief portfolio strategist at Wells Fargo Advantage Funds in Menomonee Falls, Wisconsin.
“This report was superficially attractive, but when you get into the details it’s a little bit uglier,” Jacobsen said. “That expectation of when the first rate hike may take place is pretty well anchored.”
Forward markets for overnight index swaps, derivative contracts that speculate on the path of the federal funds rate, show traders predict the first increase in about September 2015, data compiled by Bloomberg show. Futures tracking the main interest rate show investors also betting it will be unchanged until then.
The Fed has held the target rate for overnight loans among banks at zero to 0.25 percent since December 2008.
Even with some gauges showing weakness, the strength in today’s report raises the odds the Fed will lift rates sooner, and that the rate projections by FOMC participants will shift higher at their next meeting June 17-18, according to Richard Gilhooly, a rates strategist at TD Securities Inc. in New York.
The median projection in March showed officials expecting the rate to rise to 1 percent at the end of 2015 and to 2.25 percent a year later. In December, the projection was 0.75 percent at the end of next year and 1.75 percent year-end 2016.
“The balance of pressure is going to be for higher rates earlier,” Gilhooly said today. “The centrists and the hawks on the FOMC will be gunning for earlier and more rate hikes.”
The yield on two-year Treasury notes, which are sensitive to changes in Fed policy, increased 0.02 percentage point to 0.42 percent at 4:33 p.m. in New York. The yield on the benchmark 10-year security declined 0.03 point to 2.6 percent as escalating tensions in Ukraine outweighed the U.S. employment report.
The employment report showed the number of Americans working part-time for economic reasons increased by 54,000 to 7.47 million, while the labor-force participation rate slumped to 62.8 percent, matching the lowest level since 1978. Average hourly earnings growth tumbled to 1.9 percent from a year earlier, the weakest gain since March 2013.
“This is a difficult report for the Fed,” said Tim Duy, a former Treasury Department economist who is now a professor at the University of Oregon in Eugene.
“The headline numbers are very strong and consistent with a story that you are using slack in the economy fairly quickly,” Duy said. “The underlying details are fuzzier with the substantial drop in the labor force and substantial underemployment and wage growth still tepid. Wage growth is consistent with a story of substantial slack in the economy.”