The May employment situation report, while not a game changer, was pretty dramatic. We had noted here recently that based on the weak first quarter economic numbers and the FOMC minutes from the April meeting that the we should expect the Fed to finally raise the Fed funds rates 25 basis points at its September meeting. While the Fed did not completely rule out a June tightening, it was clear that it would take some pretty dramatic economic numbers —huge job growth and higher inflation—to alter that path. In fact many analysts have floated the idea that the Fed may push any move into 2016.
Despite all the machinations in the financial media, the Fed had pretty consistently targeted mid-2015 for the first rate increase. While June was on the table, the weak numbers early in the year probably pushed it to September (we assumed the hike would most likely occur when a press conference is scheduled along with the Fed announcement). And while today’s number was very strong, it was probably not enough to trigger a June move.
May nonfarm payrolls came out up 280,000; more than 50K higher than expectations and an additional 30K were added from adjustments in previous months. Perhaps more importantly, hourly earnings rose 8¢ for the month, a sign of a pick-up in inflation.
Despite this, one story in Reuters noted that the number put a September tightening back on the table. I don’t think it was ever off. That last bit of good news led to headlines that a June tightening was back on the table so things are moving in the punditshpere.
Another Reuters story cited a CME Group FedWatch calculator as indicating a better than 50% chance of a rate hike at the October meeting. This is a misreading of the tool because it sets the Fed Funds rate in increments of 25 basis points at each quarter point. The problem is that the current Fed fuds target is between 0-0.25%, and the calculator is not set for increments in between those figures so it is assuming a current rate of 0.25%. The Fed has indicated that they likely will continue to use a range so the first rate hike will likely move the Fed Funds rate to between 25 and 50 basis points. That means when the CME FedWatch calculator shows a 47.1% chance that Fed funds will be at 25 basis points in September and only a 21.4% chance of it being at 0, that is indicating a bias for a rate increase. When added to the rest of the calculator figures it indicators a higher likelihood of an increase in September.
Of course, the other wild card is the fact that yesterday the International Monetary Fund (IMF) has urged the Fed to hold-off on any tightening until the first half of 2016 according to a story in the Christian Science Monitor. I can’t see that holding much sway. While the Fed does need to be conscience of the global economy, it is proud of its independent status and does like it when U.S. politicians try to dictate what it should do let alone the IMF.
We noted how silly it is for so much hand wringing over a 25 basis point move. The Fed needs to get on with it. In fact the June 17 FOMC meeting, while unlikely, would be preferable.