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Job Losses 5 Straight Months

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Job losses 5 straight months

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

Entry #125

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