After this week’s jobs report, the Fed is in control (SPY, USD, TLT)

8 Aug 2015 | Author: | No comments yet »

Labor market swagger has US Fed warming to September rate hike.

Federal Reserve officials are growing more comfortable with the idea of beginning to tighten policy next month, as the U.S. labor market’s improvement makes it harder for even dovish officials to justify historically low interest rates.NEW YORK — U.S. stocks fell Friday after a solid jobs report kept alive the possibility that the Federal Reserve might raise interest rates as soon as next month.

Data on Friday pointing to a firming economy and job market, as well as comments from Fed officials, suggest weak U.S. inflation and outside risks like China’s recent stock market crash are unlikely to dissuade the central bank from raising rates at a mid-September meeting. As financial markets prepare for rates to rise from near zero, where they have been since the depths of the financial crisis in late 2008, current and former Fed officials who spoke to Reuters worry that delay could damage the bank’s reputation, especially if the world’s largest economy picks up steam. “She is willing to move,” said David Stockton, the central bank’s former research director and a fellow at the Peterson Institute for International Economics. The economy’s sharp winter slide, alongside a strengthening dollar and falling oil prices, pushed the Fed to back off its long-telegraphed plan to raise rates by mid-2015. A second-quarter rebound to a 2.3 percent economic growth rate emboldened those who viewed earlier weakness as temporary and not a symptom of deeper fragility in the recovery. U.S. employers added 215,000 jobs in July, the Labor Department said Friday, another signal that the job market is improving and providing another key piece of data for the Fed as it assesses whether the U.S. economy can withstand higher interest rates.

Monthly job gains have averaged 211,000 so far this year and Friday’s data showed another month of gains across wide swaths of the economy, with only energy a laggard. The Standard & Poor’s 500 index fell 5.99 points, or 0.3 percent, to 2,077.57, and the Nasdaq composite fell 12.90 points, or 0.3 percent, to 5,043.54. The August jobs report comes on Sept. 4. “If we get confirmation of the current trend I think September is a good bet,” said Roberto Perli, partner at research firm Cornerstone Macro and a former senior Fed staffer. Last month Boston Fed President Eric Rosengren, who like Yellen has long advocated sticking with near-zero rates to get more Americans back to work, told Reuters even he could endorse a rate hike at the Sept. 16-17 policy meeting if labor markets continued to improve. This week the Atlanta Fed’s Dennis Lockhart, a centrist whose views usually reflect that of the core decision-makers, said in a newspaper interview it would take a “significant deterioration” in the economy to convince him not to support a measured tightening next month.

Yet the Fed gave a strong signal last week when its policy-setting committee said it now needed to see only “some” more improvement in the labor market. “The Fed would like to get the first move out of the way – it would be in its best interest and in the markets’ as well,” said Perli. “You might miss a window if you wait too long.”

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