Does the Weak Jobs Report Mean No Rate Hike This Year?

For the past several months, economists and stock market pundits have engaged in a tug of war over if and when the Federal Reserve would finally raise interest rates.
Ever since the Great Recession took hold in 2008, the U.S. central bank has gradually decreased rates to historic lows. This was designed to lift the U.S. economy out of the worst recession since the Great Depression, by making debt cheaper to incentivize economic activity.
Fast forward to today, and the benchmark federal funds rate remains near zero. It was widely expected that the Federal Reserve, under Chairwoman Janet Yellen, would finally increase interest rates in September. That would have represented the first rate hike in a decade. But after a stock market sell-off in China and worries over slowing global economic growth, the Fed has still not acted.
Last month’s weak jobs report may have quashed hopes of a 2015 rate hike for good.

September Jobs Number Disappoints

The Labor Department announced that last month employers added a relatively modest 142,000 new jobs. That badly missed expectations. Economists had predicted 200,000 new jobs in September. As if that weren’t disappointing enough, job gains in July and August were revised downward by a combined 59,000.
Not surprisingly, manufacturing and mining were among the hardest-hit sectors of the economy. Manufacturing employment fell by 9,000 positions, which was weaker than expected, due to the strengthening U.S. dollar. Mining employment declined because of the steep collapse in precious metals prices over the past several months.
The next meeting of the Federal Open Market Committee will not take place until Oct. 27-28. If U.S. economic data continues to come in soft, the Federal Reserve could put off raising rates this year altogether.

Rationale for a 2015 Hike

Not everyone is on board with the Federal Reserve holding off until next year to raise rates. Some economists have raised the argument that with rates still stuck at zero and quantitative easing having run its course, the Fed now has no tools left in its toolbox. Should the U.S. economy dive into recession, the Fed will have little at its disposal to help boost the economy.
If the Fed decided to finally raise rates and get the first hike over with, it could at least have the option to lower rates back to zero if the U.S. economy continued to sputter in 2016.
And many pundits argue that the U.S. economy is actually in a much better position than it seems. With the unemployment rate at 5.1%, a seven-year low, some believe keeping interest rates this low is doing more harm than good. Indeed, those with savings have suffered through many years of pitiful returns.
Fixed-income securities like bonds offer very low yields. The 10-year U.S. Treasury bond yields just 2%, and traditional savings vehicles like certificates of deposit offer very little in interest. Since virtually every American keeps some of their savings in the bank, raising interest rates would put more money in the pockets of millions of savers.
Ultimately, whether the Federal Reserve finally increases interest rates will depend on economic data going forward. Janet Yellen has stressed that the central bank needs to see more inflation, but with the rising U.S. dollar and low commodity prices, this does not seem likely. Investors may want to adjust their expectations, as a 2016 rate hike seems to be the more likely course of action.

How to sleep easy at night

Is the economy keeping you up night? Do you worry there’s another crash just around the corner? If so, you can stop worrying right now. All it takes is a few minutes. Find out how right here.