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Job Losses 5 Straight Months
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The employment report for May was released this morning and the economy has a rather inauspicious streak going, with job losses posted every month since the beginning of the year. You might say job growth is 0-for-2008, to use the baseball parlance.
Specifically, payrolls shrunk by 49,000 jobs in May, with negative revisions to both April and March. In April, the economy shed 28,000 jobs and in March the job shrinkage is now 88,000 (revised from 20,000 and 81,000 losses, respectively). Hourly earnings increased 0.3 percent which, after inflation terms, is nada. The unemployment rate increased to 5.5 percent.
Bernanke sends clear message: Bernanke made two speeches earlier this week, but his remarks Tuesday validated the widely held belief that the Fed intends to move to the sidelines. How long the Fed stays there remains to be seen, but don't expect rate hikes any time soon, even with all the inflation ugliness.
Why? I see three reasons. First, the Fed spent the past nine months ushering homeowners with adjustable rate mortgages to safety by drastically cutting short-term interest rates. They did so to such an extent that many homeowners saw negligible rate resets in 2008, unlike the experience of their neighbors in 2007. This has prevented untold additional foreclosures and, given the significance of this relief, the Fed will be unwilling to throw those same homeowners back under the bus by raising interest rates too much, too soon.
Secondly, the weakness in the broader economy and the tenuous improvement in credit markets provides little latitude for the Fed to raise interest rates. And finally, the looming presidential election - although it shouldn't factor into the equation - makes this a particularly sensitive time for the Fed to consider any interest rate increases. Can you imagine the field day the candidates would have if the Fed raised interest rates prior to the election? One other tidbit: The decision to appoint Ben Bernanke to another term as Chairman of the Fed, or not, will rest with the winner of the upcoming election (Bernanke's term expires in 2010).
Don't get me wrong. I'm not saying the Fed shouldn't do whatever is necessary to tame inflation. (I personally think they should). But I am saying that it will be difficult for them to raise interest rates anytime soon, even if the inflation picture gets worse. The Fed continues to believe that inflation will moderate on its own, though you can sense some waffling in that stance as oil goes higher. Let's hope they're right.
FedOutlook is a blog on the Fed and Federal Reserve actions written by Greg McBride, CFA.
-- Posted: Jun. 6, 2008
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