Federal Reserve policy makers have another reason to delay an interest-rate increase after a weak March payrolls report corroborated a first-quarter slowdown in the U.S. economy. The question 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 for January and February. The weaker data contrast with 12 straight months of 200,000-plus monthly gains.

The Fed is watching for the economy to reach or approach full employment and generate higher inflation before raising interest rates from near zero. Fed Chair Janet Yellen and her colleagues last month opened the door to an increase as soon as June, while also suggesting in forecasts that September may be a more likely time to begin tightening.

“This single report will not necessarily result in the Fed changing tack on its view of policy tightening this year,” Millan Mulraine, a research strategist at TD Securities USA LLC in New York, wrote in a note after the report. “What it will do is weaken the argument for a midyear hike and it will place a greater premium on the next few employment reports as the Fed looks for evidence that the relapse in economic growth and labor market momentum is temporary.”

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 their meeting on June 16-17, when they will also release new economic and interest-rate forecasts.

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

The weak payrolls number could cause FOMC members to turn increased attention to jobs data and away from inflation “at the margin,” said Ray Stone, managing director at Stone & McCarthy Research Associates in Princeton, New Jersey.

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

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 full employment. Most project it's equivalent to a 5 percent to 5.2 percent unemployment rate, down in March from the 5.2 percent to 5.5 percent range they had in December.

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

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

The outlook appears more upbeat to Karen Dynan, the Treasury Department's chief economist and a former top researcher at the Fed board during a 17-year career there. “Domestic fundamentals look strong” and the world's largest economy remains poised for above-trend growth in 2015 even after the March slowdown in jobs creation, Dynan said in an interview in Washington following remarks at a Fed conference.

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

Billionaire investor Bill Gross said the disappointing jobs report won't dissuade the Fed from raising interest rates by September. “They want to get off zero, if only to prove that they don't have to stay at zero for a long, long time,” Gross, who runs the $1.5 billion Janus Global Unconstrained Bond Fund, said in a Bloomberg Television interview Friday.

The odds of a June liftoff implied by federal funds futures fell to 11 percent after the report from 18 percent Thursday. The implied probability of a September rate rise also slumped after the release, 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 47 percent chance the Fed will raise rates this year and just a 55 percent chance of an increase by March 2016. The central bank has kept its main rate near zero since December 2008.

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

Yellen said last week interest rates will probably be raised in 2015 and made the case for a cautious approach to subsequent increases. Speaking in San Francisco, Yellen cited strong gains in the labor market as a sign that restraints on the economy are abating.

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

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

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

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

Instant Insights /

Rates Unlikely to Rise Before September

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