• Dec. 4, 2016, 10:26 pm

Weak US employment growth further suggests Fed rate rise was a mistake

Powered by Guardian.co.ukThis article titled “Weak US employment growth further suggests Fed rate rise was a mistake” was written by Larry Elliott, for theguardian.com on Friday 5th February 2016 14.55 UTC

Hindsight is a wonderful thing. It’s easy to be wise after the event and say a decision was a mistake. But it’s hard to imagine that the Federal Reserve would have raised interest rates in December had it known then what it knows now.

News that employment growth as measured by the increase in non-farm payrolls was up by 151,000 is just the latest piece of evidence to suggest that the US economy is going through a tough period. Growth in the fourth quarter was weak, sales of durable goods suggest that businesses are reluctant to invest, and consumers are saving rather than spending the windfall from lower oil prices.

Even so, Janet Yellen, chairman of the Fed, is not going to hit the panic button and reverse December’s increase – at least not yet. There are two reasons for that: a U-turn would be a considerable blow to the central bank’s reputation; and the Fed will want to see more evidence before it decides that the world’s biggest economy is heading for a recession rather than simply going through a temporary soft patch.

There was enough in the latest jobs report to support a wait-and-see stance. The increase in payrolls was certainly smaller than Wall Street had been expecting, and December’s rise was revised down too.

On the other hand, an increase in the length of the average working week and a 0.5% increase in weekly earnings will be taken by the Fed as evidence that the labour market is not quite as weak as the headline payrolls figure would suggest.

When the Fed raised rates in December, there was an assumption it would move for a second time in March. Two months of market turmoil and indifferent economic news means that is now completely out of the question. Employment is a lagging indicator of economic performance: it says more about what was happening a few months ago than it does about the present state of activity.

The Fed will sit tight and wait to see whether the strong jobs data in the last few months of 2015 was as good as it gets. If that is the case, the US is heading for a bumpy, perhaps even a hard, landing. And it will be time for Yellen to panic.

guardian.co.uk © Guardian News & Media Limited 2010

Published via the Guardian News Feed plugin for WordPress.

Get Daily Digest

No spam guarantee.

Leave A Comment