The argument for a June interest-rate hike from the Federal Reserve has evaporated.
Economists and investors largely agreed that Friday's disappointing employment report for May—the U.S. economy added just 38,000 new jobs—all but eliminated the chance that Fed officials would tighten policy when they meet June 14-15 in Washington, and may make it difficult for them to raise in July.
"Today's labor market report is sobering and suggests that the labor market has slowed," Fed Governor Lael Brainard told an audience in Washington. "Prudent risk management implies we should wait for additional data to provide confidence that domestic activity has rebounded," said Brainard, who has previously argued for patience on raising rates.
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Recent comments from other officials prior to the report, including Chair Janet Yellen on May 27, had signaled they were in favor of a rate increase in coming months. Yellen delivers remarks again on Monday, making her the last scheduled Fed official to speak publicly before the quiet period they typically observe the week before a Federal Open Market Committee meeting.
"I thought she would be kind of sealing the case for June," said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC in New York. "Maybe it's time for her speech writers to plan a long weekend."
Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York, said the report "raises some questions about the momentum of growth and about the outlook."
"This takes June off the table," he said. "To get to July, we're going to need a pretty nice rebound in the data."
Odds of a June hike implied by futures trading, which had risen as high as 34 percent in late May as Fed officials hinted at their eagerness to raise rates, tumbled to just 4 percent following the employment report. The odds are based on prices in federal funds futures contracts.
Brainard wasn't the only U.S. central banker sending dovish signals on Friday.
Chicago Fed President Charles Evans, speaking in London before the employment report was released, said officials should consider delaying a rate increase until core inflation was back up to their 2 percent target—something he expects will take three years.
Numbers Likely Aren't a One-Month Aberration
The Labor Department report released Friday showed employers added jobs in May at the slowest pace since 2010, even as unemployment declined to 4.7 percent. The drop, however, was caused not by job creation but by people leaving the work force.
The labor force participation rate—those working, plus those looking for work, as a percentage of working-age Americans—fell to 62.6 percent, from 62.8 percent in April. What's more, the share of Americans working part time because they couldn't find full-time work—a gauge Yellen has indicated she's watching for signs of remaining slack in the labor market—jumped to the highest since August.
The number of jobs added in April was revised down to 123,000 from 160,000.
Carl Tannenbaum, chief economist at Northern Trust Corp. in Chicago stressed that the dismal May numbers couldn't be dismissed as a one-month aberration.
"The revisions were so significant it does begin to paint a trend of deceleration over three months," he said. "I find it hard to fathom we're going to speak a month from now and find all this has been a bad dream."
The employment report comes as a surprise as U.S. economic data has been mostly positive in recent months. Initial jobless claims have declined for three consecutive weeks. The Atlanta Fed's GDPNow estimates that second quarter growth is on track to hit 2.5 percent on an annualized basis.
"Maybe today's report is telling us that the U.S. is not immune to the slowdown in the rest of the world after all," said Chris Rupkey, chief financial economist with Bank of Tokyo-Mitsubishi UFJ Ltd. in New York. "Growth in the rest of the world is slowing. The million-dollar question is whether the U.S. is experiencing a material economic slowdown as well."
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