The best-laid plans can come undone by the tiniest of things.
In this case a slip in the data—a low point on nonfarm payrolls that may prove no more than a statistical bump—put a June interest rate hike out of reach for the Federal Reserve and probably a July one as well. That leaves September in focus as the next chance for the U.S. central bank to tighten policy—if the data hold.
Back in April, I predicted the Fed would want to increase the uncertainty surrounding the June meeting. That it did, responding to complacent market participants expecting the Fed to take a pass on June with a barrage of “Fedspeak” that placed the month clearly on the table. See, for example, comments by Federal Reserve Bank of San Francisco Presidents John Williams and Atlanta Fed Presedient Dennis Lockhart. The minutes of the April meeting arrived on the heels of these comments and erased any doubt that Federal Open Market Committee participants considered a June rate hike a real possibility:
“Participants agreed that their ongoing assessments of the data and other incoming information, as well as the implications for the outlook, would determine the timing and pace of future adjustments to the stance of monetary policy. Most participants judged that if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the Committee’s 2 percent objective, then it likely would be appropriate for the Committee to increase the target range for the federal funds rate in June.”
That data had looked to be supporting that view as GDP tracking numbers signal a rebound in second-quarter growth after a dismal first-quarter outcome:
But then came the May employment report. Job gains of 38,000 were low even after accounting for a strike at Verizon Communications Inc. that cut 35,000 jobs from the telecommunications sector, and previous months were also revised downward. Slowing output growth appears to have caught up with what had been resilient labor markets, leaving in doubt the continued progress on reaching the Fed’s full employment mandate. A June rate hike abruptly fell off the table with the futures market now indicating a zero percent chance of an increase in June, according to Bloomberg data.
Where does that leave us now?
Note that the Fed retains a fundamentally optimistic economic outlook.
This was particularly apparent in Federal Reserve Chair Janet Yellen’s speech last week:
“My message will be largely favorable, although recent developments have been mixed. Most importantly, the economy has registered considerable progress over the past several years toward the Federal Reserve’s goals of maximum employment and price stability, and, as I will explain, there are good reasons to expect that we will advance further toward those goals. … If incoming data are consistent with labor market conditions strengthening and inflation making progress toward our 2 percent objective, as I expect, further gradual increases in the federal funds rate are likely to be appropriate and most conducive to meeting and maintaining those objectives.”
Yellen also urged caution in reading too much into the May employment numbers:
“Although this recent labor market report was, on balance, concerning, let me emphasize that one should never attach too much significance to any single monthly report. Other timely indicators from the labor market have been more positive.”