Fed member Brainard urges caution on raising rates

Friday’s disappointing employment report for May, which showed that the USA economy added just 38,000 new jobs, adds further to my stance of no rate hike in June by the Fed.

The job increases in March and April were also revised downward, with the combined job gains in these two months at 59,000, less than previously reported.

Even as job growth stalled, the government said that the nation’s unemployment rate fell to 4.7 percent from 5 percent.

The share of Americans who are working or searching for jobs – a figure known as the labor force participation rate – fell in May to 62.6 percent, near a four-decade low.

Expectations of a rate hike in June had surged post release of Federal Open Market Committee (FOMC) April meeting minutes; however, weak job numbers released Friday have lowered the probability of any such hike in June.

Last week, Fed Chairwoman Janet L. Yellen said continued economic improvement would make it appropriate to “gradually and cautiously” raise the rate, “probably in the coming months”.

Recent US data on consumer spending, industrial production, exports and housing had suggested that the economy was gathering speed after growth slowed to a 0.8% annualised rate in the first quarter. That brought average monthly job growth in the past three months to 116,000, a sharp slowdown from the average growth of 219,000 over the prior 12 months. Now many observers expect no action before the Fed’s meeting in July.

It is possible that a strike by 35,000 workers at Verizon, a telecoms firm, crimped the numbers slightly.

The labor report sent the dollar tumbling 2.0 percent to $1.1363 per euro and by 2.1 percent to 106.63 yen.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said the job growth was “startlingly weak” even after taking into account the effect of the Verizon strike. The most recent projection from Fed authorities forecasted the unemployment rate to dip to 4.7 percent by the end of the year, the level it reached last month. The rate fell for a problematic reason: almost a half-million jobless Americans stopped looking for work and so were no longer counted as unemployed.

In the absence of company-specific news for traders to digest, most of the focus will remain on macro events like an interest rate hike, general economic weakness and the Brexit vote on June 23, in which the United Kingdom will decide whether or not it is leaving the European Union.

A week earlier, Fed Governor Jerome Powell, in a speech to the Peterson Institute for International Economics, stated that economic data in April seemed to support the Federal Reserve raising interest rates.

When you get closer to the summit of the mountain of full employment (and we’re not there yet, we’ve still got slack in this economy), you start to see a tradeoff where you have less jobs created in a given month, but you start to see earnings go up.

The price of the 0.875 percent note due in May 2018, rose 7/32, or $2.19 per $1,000 face amount, to 100 6/32.

Chicago Fed President Charles Evans told CNBC on June 2, “Two rate hikes in 2016, that’s my own call for that, if the data continues to be in line with my outlook”.

Fed officials may not keep investors guessing for long: Yellen will speak Monday in a closely watched address that may show how she has interpreted Friday’s report.