The latest non-farm payroll report showed the US economy added 223,000 jobs in June, well below expectations for a 245,000 increase, and when the net 60,000 downward revision for the previous two months are factored in, the moot question that needs to be asked is whether the markets were actually overzealous about labor market conditions, said Lindsey Piegza, chief economist at Stifel Financial.
Furthermore, the drop in the unemployment rate, which could partially be attributed to a record low labor force participation rate that was last seen in the seventies, fully reflects the fact that nearly half-a-million Americans dropped out of the labor force.
Also, the average hourly earnings show a non-existent wage pressure. So, frankly speaking, no component of the employment report suggests growing confidence in the labor market strength, something the Fed has been clear they want to see in order to justify a near-term rate increase, she observed.
However, since the US economy is likely to add nearly three million jobs this year, we are likely to see a rate increase in the late third quarter or early fourth quarter, said Tom Gimbel, CEO of LaSalle Network. The economy is expanding at a robust pace, though growth may not be great.
When companies can borrow virtually for free, they get richer, which is reflected in their stock prices. The moot question, however, is whether the recovery is real? To test the recovery’s strength, the Federal Reserve is likely to increase rates marginally to see the effects since the near zero rate regime has been going on for 6-7 years now and a rate hike is more likely in early fourth quarter, he noted.
As evidenced by successive FOMC minutes, several Fed officials are itching to raise rates. Asked if a rate hike sooner rather than later will kill the economy, Lindsey said it’s very clear many Fed officials are eager to raise rates as they have been for the past several years.
But the continued under-performance of the economy has kept the Fed sidelined. The economy’s under-performance is likely to persist this year and a Stifel Financial believes a liftoff is possible only in 2016.
While it’s true a quarter-percentage interest rate increase will not kill the economy, it’s worth remembering the Fed’s mandate is stable prices and full employment. With inflation at near negative territory or in negative territory – depending upon the indices one is watching, and labor market conditions modest – far from robust, it’s very hard to justify a liftoff at this point, she concluded.
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