Plunging Unemployment Bolsters Case for Earlier Fed Rate Rise

Washington (July 4)  A plunge in U.S. unemployment to the lowest level in more than five years bolsters the case for Federal Reserve officials to raise the main interest rate earlier than they forecast just three weeks ago.

Payrolls surged in June by 288,000 workers and unemployment fell to 6.1 percent, a level that Fed officials didn’t expect to see before the end of the year, a government report showed yesterday. Further job gains would probably prompt the Fed in September to raise its projections for the benchmark interest rate at the end of 2015 and 2016, said Roberto Perli, a partner at Cornerstone Macro LP in Washington.

“If the recent trend in the labor market continues, the next FOMC interest-rate projections should be even higher,” Perli said in a note to clients, referring to the Federal Open Market Committee. (FDTR) “With inflation approaching the 2 percent target and the unemployment rate continuing to decline, the odds that the Fed will lift rates off of zero sooner than the market expects are increasing,” said Perli, former associate director of the Fed’s Division of Monetary Affairs.

Wall Street economists, responding to the jobs report, pushed forward estimates for the first Fed interest-rate increase since 2006.

Source: Bloomberg