Worsening Labor Conditions Spook Federal Reserve

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Deterioration in America’s job market are making the Federal Reserve reverse course on its plans to raise borrowing costs.  In May, several chief Fed officials gave public speeches and interviews urging markets to prepare for an interest rate hike.

Citing a strong economic recovery, improvements in spending and a rise in inflation, Fed chiefs said a rate hike in the coming months was a wise course of action to ensure price growth did not spiral out of control. Federal Reserve President, Janet Yellen, noted the appropriateness of a rate hike given the strong economic data, noting in particular improvements to the labor market that would justify raising borrowing costs for average Americans.

More recent data has caused the Fed to reverse course. Last week, the Bureau of Labor Statistics noted weak job growth that was 1/3 of expectations. With just 38,000 new jobs added in May and broad job losses in multiple sectors, the BLS report was called a “disaster” by many analysts, and futures markets predicted the Fed would not raise rates in June.

More recently, the Fed made public remarks that are in direct opposition to last month’s strong hints of a rate hike.

Earlier this week, Janet Yellen doubled down on her earlier call of improvements in the U.S. job market, noting, “the economy added 2.7 million jobs last year, an average of about 230,000 a month.”  She added that an "increase in the quits rate is a sign that workers are feeling more confident about the job market and are likely receiving more job offers."

At the same time, Yellen acknowledged last week’s labor market report was “disappointing” and admitted that marginalized workers and struggling Americans are still in a poor financial position. "A broader measure of labor market slack that includes workers marginally attached to the workforce and those working part-time who would prefer full-time work was unchanged,” she said. Yellen also said the report was “concerning”.

She noted the growing unevenness in the job market as average wages tick upward for employed Americans but unemployed Americans are finding it harder to get jobs.

"Unemployment rates rose more during the recession for African Americans and Hispanics than for the nation overall, and even though those rates have also come down by more during the economic expansion, unemployment remains higher for these groups. Unfortunately, those gaps have not narrowed noticeably relative to where they were before the recession,” Yellen said.

A new report from the Federal Reserve also shows the job market is not as good as the Fed insisted it was a month ago. The Federal Reserve’s Labor Market Conditions index fell 41% to -4.8, the biggest fall since 2009. That abnormal collapse in labor market conditions signals the difficulty Americans are having in finding and keeping jobs.

Several investment banks released notes yesterday noting that the change in this index is another sign that the job market is getting worse, which could signal weaker demand in the American economy and slower economic growth in the 2nd quarter than previous estimates had anticipated.