|
 |
|
|
|
|
|
|
Tuesday July 06, 04:28
|
|
Fed Is More Likely to Continue Moving Carefully
|
|
The surprisingly weak labor report for June, in which job growth softened, hours worked fell and hourly pay barely rose, increased the likelihood that Federal Reserve officials will keep moving carefully in raising interest rates.
The report, coupled with other recent evidence of somewhat slower economic growth, strongly points to no more than another quarter percentage point increase, to 1.5 percent, in the Fed’s target for overnight rates when officials meet Aug. 10. Officials raised the target by a quarter point last week, the first increase in four years.
A few analysts said the report, released Friday, made it questionable whether rates would be increased at all next month.
Most U.S. labor market data are noisy, with dips and surges that have far more to do with the statistics themselves than the real economy. There is no reason to think the economic expansion is in real trouble.
Nevertheless, the data were a reminder that the economy is far from overheated. Even with inflation higher than it was a few months ago, the Fed doesn’t need to move aggressively to slow economic growth to keep prices under control.
Consumers Negative
Economist Robert V. DiClemente of Citigroup believes this spring’s jump in oil and some other prices has already caused a negative response among consumers.
``Consumers are flatly not on board with the idea of indiscriminate broad-based [business] `pricing power,’ as spending has wilted in the face of sharply higher headline inflation,’’ DiClemente told clients at week’s end.
``With May personal consumption in hand, along with soft June vehicle sales, real [consumer] outlays appear to be growing at barely a 2 percent rate for the spring quarter. That is hardly the fuel needed to validate a sustained inflation or strains on resources,’’ he said.
The jobs figures and the unexpected drop in auto sales caused some forecasters to reduce their expectations for second quarter economic growth to around a 3.5 percent annual rate. While many of them still anticipate growth of 4 percent or more in the second half of the year, the spate of weak data raises some doubt about that presumed strength.
Growth Rate
With first quarter growth now pegged at a 3.9 percent rate, a 3.5 percent second quarter would mean an average of 3.7 percent for the first half. That’s more or less what many Fed officials regard as the economy’s current potential growth rate, an estimate consistent with first half labor data.
For five of the last six months, including June, the nation’s unemployment rate was 5.6 percent. In other words, growth in the first half of the year was only strong enough to stabilize the rate, not bring it down.
Nor was growth strong enough to generate a surge in wages. Average hourly earnings rose only 0.1 percent in June and 2 percent in the past 12 months. Gains in April and May were larger -- 0.3 percent each month -- due largely to big increases in a single industry, airline transportation.
That’s ``certainly not a steamy pace by historical standards,’’ said Ray Stone of Stone & McCarthy Research Associates.
Weak Auto Sales
Stone, who follows the labor data closely, said that in the second half of the year he expects payroll jobs to increase about 225,000 a month, in line with the average for the past three months. The June gain of 112,000 is not evidence of a new trend, he said.
On the other hand, Stone and a number of other analysts have a wary eye on the automobile industry, still a key element of the economy. As sales have softened, the industry has cut back production and employment, he said.
``Auto dealer inventories are simply too high, and misbalanced given the hike in gasoline prices,’’ Stone said. What he meant was that dealers have too many gas guzzling SUV’s on hand and not enough fuel-efficient vehicles.
Again, such details don’t mean the economy is suddenly in trouble. They do matter as Fed officials continually try to figure out how monetary policy should respond to changes in inflationary pressures.
Moving to `Measured’
Back in March, before the spurt in payroll job growth, the Federal Open Market Committee met, left interest rates unchanged and issued a statement that said, ``With inflation quite low and resource use slack, the committee believes that it can be patient in removing its policy accommodation.’’
By the May FOMC meeting, there had been two months of strong job growth and inflation had unexpectedly accelerated. According to minutes of the May meeting, which were released on Thursday, ``All of the members agreed that, with policy tightening likely to begin sooner than previously expected, the reference to patience was no longer warranted. The committee focused instead on a formulation that would emphasize that policy tightening, once it began, probably could proceed at a pace that would be ’measured.’’’
That didn’t sit well with everyone around the table. ``A number of policy makers were concerned that such an assertion could unduly constrain future adjustments to the stance of policy should the evidence emerging in coming months suggest that an appreciable firming would be appropriate,’’ the minutes said.
June Numbers
Some on the committee -- probably those more worried that inflation may have been accelerating in a fundamental rather than a temporary way -- didn’t relish the constraint on future action use of the word ``measured’’ would imply.
A larger group on the committee, ``however, saw substantial benefits to inclusion of the proposed language,’’ the May minutes continued. ``These members noted that current economic circumstances made it likely that the process of returning policy to a more neutral setting would be more gradual, once under way, than in past episodes when inflation was well above levels consistent with price stability.
``In addition, some policymakers observed that the timing and magnitude of future policy adjustments would ultimately be determined by the committee’s interpretation of the incoming data on the economy and prices rather than by its current expectation of those developments,’’ the minutes said.
Well, the incoming data have softened, and they could easily continue in that vein for the next month or two.
As for the impact of the June labor numbers on the Fed, economist Peter Kretzmer of Banc of America Securities said, ``The report will strengthen the Fed’s intention to raise its federal funds rate (target) at a measured pace, and (it) even raises significant doubts about an August tightening.’’
(Bloomberg)
|
|
All reviews
|
|
|
|
|
|
|
|
|
|
 KEYWORD SEARCH |
|
|
|
|
|
SUBSCRIPTION |
|
|
|
|
|