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Goldman: The April jobs report has us rethinking the Fed

Sam Ro
Managing Editor

April was less than stellar for the US labor market.

Companies added just 160,000 nonfarm payrolls during the month, which was less than the 200,000 consensus estimate. Meanwhile, the unemployment rate was unchanged at 5.0%.

The economists at Goldman Sachs were particularly disappointed by the report. The team, led by David Mericle, had forecast 240,000 new jobs, which they expected to support their call that the Federal Reserve would raise interest rates during their next Federal Open Market Committee (FOMC) meeting in June.

“In light of weaker-than-expected payrolls and recent Fed communication, we no longer expect a rate increase at the June FOMC meeting,” the economists said in an email. “We now forecast the next rate hike will come in September.”

In December, the Fed began its long process of normalizing monetary policy by hiking interest rates for the first time since June 2006. The idea is that the US economy is strong enough to handle higher short-term interest rates, which have been near 0% since December of 2008.

But some signs of slowdown in the US economy and elevated uncertainty abroad has more and more folks arguing that the world isn't quite ready for more rate hikes just yet.

“We now only expect one rate hike in 2016, in September, down from two hikes previously, as we believe it will take longer for policymakers to accumulate sufficient evidence that economic and labor market activity is rebounding after a soft start to the year,” Barclays’ Michael Gapen said. “We also believe some FOMC members would prefer to see the outcome of the UK referendum before moving to hike rates again.”

To be fair, most economists weren't expecting a rate hike in June anyway.

Importantly — longer-term — economists seem comfortable forecasting gradual rate hikes over time.

“Does the April employment report imply an even shallower path for interest rates? Not in our view,” Renaissance Macro’s Neil Dutta said. “For one, June was unlikely irrespective of the outcome of today’s figures. Second, employment reports should be taken holistically. That means combining the growth in jobs, the length of the workweek, and hourly earnings. In this regard, the April jobs number was the strongest since January."

Average hourly earnings grew 2.5% year-over-year, which was better than the 2.4% rate expected.

"The economy is at full employment," Dutta continued. "At full employment, the growth in payrolls slow and wages rise. We saw both in April."

Sam Ro is managing editor at Yahoo Finance

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