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Latest Jobs Report Gives The Fed a Green Light to Raise Short-Term Rates, Says Bach

WASHINGTON, D.C. — The August jobs report “gives cover” to the Federal Reserve to finally raise short-term interest rates by a quarter of a percent during its policy meeting on Wednesday and Thursday of this week, says Robert Bach, director of research for the Americas at Newmark Grubb Knight Frank. “Whether they choose to walk through that door, or dawdle for a while on this side, remains to be seen.”

The U.S. economy added a modest 173,000 jobs in August, according to the U.S Bureau of Labor Statistics (BLS). What’s more, job gains have averaged 221,000 over the past three months and 247,000 over the past 12 months.

“There will never be a perfect time for the Fed to begin the long process of returning monetary policy to its pre-crisis equilibrium, but doing so will give them more leverage to combat the next recession, whenever it occurs,” emphasizes Bach.

The Federal Reserve’s target for the fed funds rate — the interest rate at which banks and other depository institutions lend to each other on an overnight basis — has been between 0 and 0.25 percent since December 2008. A quarter-point increase would move that target to between 0.25 percent and 0.50 percent. The significance is that the fed funds rate serves as a baseline for other interest rates.

“As banks’ borrowing costs rise, they raise the rate they charge borrowers, including mortgagors,” said Bach.

The devaluation of the yuan by Chinese authorities in August and turmoil in global financial markets during the past several weeks have combined to create doubt in the minds of many observers that the Fed will raise rates at its policy meeting this week.

Among the highlights in the August jobs report:

•  The education and health services sector led with a robust 62,000 new jobs, mostly in health care. Three other sectors each gained 33,000: professional and business services; leisure and hospitality, (mostly restaurants); and government (mostly local government education).

• On the other side of the spectrum, manufacturers shed 17,000 jobs as they struggled with the stronger dollar and weaker global growth, and mining and logging lost 10,000 as the oil and gas industry continued to deal with the effects of low prices.

• Wage growth rose a healthy 0.3 percent for the month, points out Bach, although year-over-year growth of 2.2 percent remained within its recent low range.

• The unemployment rate fell to 5.1 percent, its lowest rate since April 2008. The so-called “U-6 rate,” which includes people marginally attached to the labor force and those working part time who want a full-time job, fell a notch to 10.3 percent, the lowest level since June 2008.

* The labor force participation rate was unchanged at 62.6 percent, its lowest rate since October 1977.

Ryan Severino, senior economist with New York-based Reis, says that although the 173,000 jobs created in August was a bit below expectations, the BLS report was encouraging overall. “Given the difficulty in seasonally adjusting the data, I expect the figure to be revised up,” says Severino. “Nonetheless, the labor market continues to tighten, average hourly earnings continue to increase, and the unemployment rate hit a seven-year low of 5.1 percent, which is basically full employment.”

The increase in hourly earnings means more money in workers’ pockets, says Severino. “This bodes well for retail and consumption going forward.”

— Christina Cannon

 

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