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5 Nov 2015
Non-farm payroll number alone cannot form basis for Fed to hike rate
FXStreet (Mumbai) - Payroll processing firm ADP on Wednesday reported a rise in the U.S. non-farm private employment for October by a seasonally adjusted 182,000, beating expectations. The figures have boosted optimism leading the markets to expect steady figures when the government jobs report is released on Thursday. 180,000 new jobs are expected to have been added in October and the unemployment rate is expected to remain steady at 5.1%. A steady non-farm payroll number will raise the possibility of a December rate hike.
Arguments in favour of a rate hike
The U.S. Fed has maintained that the appropriate time to raise rates is when sustained improvement in the labour market is attained and when it is “reasonably confident” that inflation will move back to its 2 per cent target over the medium term.
American payrolls had increased by 142,000 in September, well below market expectations while the unemployment rate had remained unchanged at 5.1 per cent. Job growth has averaged 198,000 per month so far.
Boston Fed’s president Rosengren observed that recent reports on wages and salaries point towards few signs that the “tightening labour markets are translating to increases in wages and salaries consistent with reaching 2 per cent inflation”. He did however add that “there’s an awful lot of uncertainty about inflation”. Federal Reserve Governor Lael Brainard has also spoken about the steady improvement in the labour market.
The FOMC members read the slowdown in payrolls' growth as a sign of near-full employment and feel the time is appropriate to hike rates.
Impact of steady payroll number offset by poor inflation figure
However it must be remembered that decision to move rates is dependent on both employment as well as inflation. It is true that the job sector has improved steadily for two years now. The inflation however continues to plague the U.S. economy staying well below the 2 per cent target. Global economic slowdown and low oil prices have hindered the rise in inflation numbers in major economies of the world and the scenario does not appear to be changing any time soon.
The US Personal Consumption Expenditure Price Index also dipped 0.1% month-on-month in September.
Fed may not hike rate in Dec despite steady jobs market
The Fed might not choose to hike rate in December despite strong non-farm payroll numbers because any decision in those lines is bound to adversely impact inflation. The fed cannot really afford to change its policy stance until the inflation figure gets close to its 2 per cent target.
Arguments in favour of a rate hike
The U.S. Fed has maintained that the appropriate time to raise rates is when sustained improvement in the labour market is attained and when it is “reasonably confident” that inflation will move back to its 2 per cent target over the medium term.
American payrolls had increased by 142,000 in September, well below market expectations while the unemployment rate had remained unchanged at 5.1 per cent. Job growth has averaged 198,000 per month so far.
Boston Fed’s president Rosengren observed that recent reports on wages and salaries point towards few signs that the “tightening labour markets are translating to increases in wages and salaries consistent with reaching 2 per cent inflation”. He did however add that “there’s an awful lot of uncertainty about inflation”. Federal Reserve Governor Lael Brainard has also spoken about the steady improvement in the labour market.
The FOMC members read the slowdown in payrolls' growth as a sign of near-full employment and feel the time is appropriate to hike rates.
Impact of steady payroll number offset by poor inflation figure
However it must be remembered that decision to move rates is dependent on both employment as well as inflation. It is true that the job sector has improved steadily for two years now. The inflation however continues to plague the U.S. economy staying well below the 2 per cent target. Global economic slowdown and low oil prices have hindered the rise in inflation numbers in major economies of the world and the scenario does not appear to be changing any time soon.
The US Personal Consumption Expenditure Price Index also dipped 0.1% month-on-month in September.
Fed may not hike rate in Dec despite steady jobs market
The Fed might not choose to hike rate in December despite strong non-farm payroll numbers because any decision in those lines is bound to adversely impact inflation. The fed cannot really afford to change its policy stance until the inflation figure gets close to its 2 per cent target.