Federal Reserve policy makers have another reason to delay aninterest-rate increase after a weak March payrolls reportcorroborated a first-quarter slowdown in the U.S. economy. Thequestion is whether that's reason enough.

Employers last month added the fewest jobs since December 2013,creating just 126,000 positions, the Labor Department said Friday.Revisions erased 69,000 jobs from previously reported tallies forJanuary and February. The weaker data contrast with 12 straightmonths of 200,000-plus monthly gains.

The Fed is watching for the economy to reach or approach fullemployment and generate higher inflation before raising interestrates from near zero. Fed Chair Janet Yellen and her colleagueslast month opened the door to an increase as soon as June, whilealso suggesting in forecasts that September may be a more likelytime to begin tightening.

“This single report will not necessarily result in the Fedchanging tack on its view of policy tightening this year,” MillanMulraine, a research strategist at TD Securities USA LLC in NewYork, wrote in a note after the report. “What it will do is weakenthe argument for a midyear hike and it will place a greater premiumon the next few employment reports as the Fed looks for evidencethat the relapse in economic growth and labor market momentum istemporary.”

Mulraine maintained his projection for an increase in September,though he said the “balance of risks” is shifting to a later start.Policy makers will get two more employment reports before theirmeeting on June 16-17, when they will also release new economic andinterest-rate forecasts.

Fed officials in March lowered their median estimate for themain rate at the end of 2015 to 0.625 percent, compared with 1.125percent in December forecasts. The estimate for the end of 2016fell to 1.875 percent from 2.5 percent, according to the FederalOpen Market Committee's (FOMC's) quarterly Summary of EconomicProjections.

The weak payrolls number could cause FOMC members to turnincreased attention to jobs data and away from inflation “at themargin,” said Ray Stone, managing director at Stone & McCarthyResearch Associates in Princeton, New Jersey.

He said they'll have to see if the U.S. returns to its strongjob-adding streak. “Even though we had a downshifting here, I thinkthe FOMC has to be pretty satisfied with the broader trends inemployment.”

Full Employment

The jobless rate held at a six-year low of 5.5 percent in March,near the level policy makers estimate for what constitutes fullemployment. Most project it's equivalent to a 5 percent to 5.2percent unemployment rate, down in March from the 5.2 percent to5.5 percent range they had in December.

Because it's difficult to tell how Fed officials will react to asingle month of weak jobs data, this report makes it even harder toproject the central bank's next move, Jim Baird, partner and chiefinvestment officer for Plante Moran Financial Advisors inSouthfield, Michigan, wrote in a note.

“This data does more to muddy the waters of expectations thanprovide clarity around policy makers' next steps,” he wrote.

The outlook appears more upbeat to Karen Dynan, the TreasuryDepartment's chief economist and a former top researcher at the Fedboard during a 17-year career there. “Domestic fundamentals lookstrong” and the world's largest economy remains poised forabove-trend growth in 2015 even after the March slowdown in jobscreation, Dynan said in an interview in Washington followingremarks at a Fed conference.

The economy expanded at a 2.2 percent annualized pace in thefourth quarter. First-quarter growth probably was 2 percent,according to a Bloomberg survey of economists. The slowdown canmainly be blamed on severe winter weather, according to 18 of 37economists in a separate survey conducted this week.

Billionaire investor Bill Gross said the disappointing jobsreport won't dissuade the Fed from raising interest rates bySeptember. “They want to get off zero, if only to prove that theydon't have to stay at zero for a long, long time,” Gross, who runsthe $1.5 billion Janus Global Unconstrained Bond Fund, said in aBloomberg Television interview Friday.

The odds of a June liftoff implied by federal funds futures fellto 11 percent after the report from 18 percent Thursday. Theimplied probability of a September rate rise also slumped after therelease, dropping to 35 percent from 39 percent as of 12:15 p.m.New York time.

Reduced Odds

Options on eurodollar futures imply traders see only a 47percent chance the Fed will raise rates this year and just a 55percent chance of an increase by March 2016. The central bank haskept its main rate near zero since December 2008.

U.S. equity futures tumbled after the jobs report. June e- minicontracts on the Standard & Poor's 500 Index declined 1 percentwhile Dow Jones Industrial Average futures slumped 165 points. U.S.exchanges were closed for the Good Friday holiday. Futures tradingresumes at 6 p.m. New York time Sunday.

Yellen said last week interest rates will probably be raised in2015 and made thecase for a cautious approach to subsequent increases. Speakingin San Francisco, Yellen cited strong gains in the labor market asa sign that restraints on the economy are abating.

Today's payrolls report “will give the Fed less confidence thatthe economy is ready to endure the policy liftoff as early asJune,” Bloomberg economist Carl Riccadonna and his colleagues wroteafter the release. “It will bring into question the degree to whichthe economy will spring back in the current quarter.”

The worse-than-expected number fits into a series of soft firstquarter data, said Robert Brusca, president of Fact & OpinionEconomics in New York. It could cause Fed officials to back awayfrom statements suggesting that a rate increase is coming soon.

“I don't understand how, with the economy this weak, the Fed caneven talk about raising interest rates,” Brusca said.

–With assistance from Matthew Boesler and Daniel Kruger in NewYork and Nina Glinski and Kasia Klimasinska in Washington.

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