Surge in jobs gives US Fed path to raise rates

New York (Jun 8)  The resurgent US job market is providing Federal Reserve officials reason to look beyond the economy’s first-quarter swoon toward an increase in interest rates later this year.

The 280,000 rise in payrolls in May suggests that the central bank is making progress toward its goal of maximum employment, William C. Dudley, president of the Federal Reserve Bank of New York, said on Friday. The gains were widespread and were accompanied by a bit higher wages, he added.

“It is likely that conditions will be appropriate to begin monetary policy normalisation later this year,” Dudley, who is vice chairman of the central bank’s policy-making Federal Open Market Committee, said in a speech in Minneapolis.

While Dudley hedged his forecast by saying a move wasn’t certain, his assertion was more definitive than comments earlier in the week by some other officials who voiced doubts about the strength of the economy. Fed watchers consider Dudley a confidant of Chair Janet Yellen and thus see his views as more indicative of where the central bank is heading.

Traders of money-market derivatives lifted the chance of the Fed raising rates this year following the jobs data. Futures show a 50 percent chance the Fed will increase interest rates by its October meeting, up from 43 percent Thursday, according to CME Group data.

“The most consistent message from policy makers this week is that they’re still data dependent, and we got one pretty big piece of data today, and that solidifies the chances for a September rate hike,” said Guy Berger, US economist at RBS Securities Inc. in Stamford, Connecticut

The FOMC meets on June 16-17 to plot monetary strategy. At their last gathering in April, many policy makers considered it unlikely they would increase rates in June, according to minutes of that meeting released by the central bank.

The benchmark federal funds rate has been kept near zero since December 2008 as the FOMC battled the worst recession since the Great Depression and then sought to keep the expansion going. The committee has said it will raise rates when it sees further labor-market improvement and is “reasonably confident” inflation will rise back to its 2 per cent goal over time.

 Policy makers have been puzzling for months over a disconnect in the economy. While the job market has stayed strong, the economy as measured by gross domestic product has been weak. GDP contracted at an annual rate of 0.7 percent in the first quarter, its worst performance in a year. Much of the debate has centered around how much of the first-quarter swoon in GDP was due to transitory forces, including harsh winter weather and a since-ended labor dispute at West Coast ports, and how much was symptomatic of a more persistent weakness in the economy.

Source: Bloomberg