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Fed Chair Yellen downplays weak jobs report, but a June rate hike viewed as unlikely

Federal Reserve Chair Janet Yellen on Monday downplayed Friday’s weak employment report and said the labor market and overall economy are improving — but the markets and most economists now believe that a June rate hike by the Fed is off the table.

During a closely watched speech ahead of the Fed's June 14-15 Federal Open Market Committee meeting, Yellen noted several issues that are causing uncertainty in the economy, including “a disappointing” and “on balance, concerning” labor report, which showed that the U.S. added just 38,000 jobs in May. She didn’t absolutely rule out a rate hike at the June meeting, but it is a possibility that most economist now are betting heavily against. 

In her first comments since the Department of Labor released the May employment numbers, Yellen said the overall direction of the labor market has been strong, averaging just under 200,000 jobs monthly over the past three months, but noted several weakening trends in the latest report. Wage growth also slowed down, the labor participation rate fell and indicators of employee confidence also were weaker.

Yellen also said the pace of inflation toward the 2 percent target range and sluggish gross domestic product growth are issues of concern. International events also are weighing on the committee’s mind, particularly Great Britain’s June 23 referendum, known as the Brexit consideration, on whether the country should leave the European Union.

As she has done previously, Yellen said gradual increases in the federal funds rate will likely be appropriate, but the timing of the increases would be data driven and are not on a preset course.

After Friday’s jobs report, analysts largely wrote off the possibility of a rate hike at the June meeting, and two committee members have already tipped their hand against such a move.

Lael Brainard, a member of the Fed’s board of governors, said in a speech Friday the data “is quite mixed and still limited, and there is important near-term uncertainty, [so] there would appear to be an advantage to waiting until developments provide greater confidence” with respect to a potential rate hike. Atlanta Fed President Dennis Lockhart on Monday said during an interview on Bloomberg Television that he would not support raising the federal-funds rate at the June meeting.

“I would think pretty close to zero,” Fannie Mae’s Chief Economist Doug Duncan told Scotsman Guide News on Monday, referring to the possibility of a June rate hike in the wake of the recent anemic jobs report. “That was a setback in the labor market, that they are going to wait and see whether that was some sort of aberration or temporary factor."

Duncan said the Fed will likely hike the rate one time this year, possibly at the September meeting. He said the labor data was the most important piece of data, but the Fed also appears to be paying close to attention to the key vote in Great Britain and whether China is able to clamp down on a credit bubble.

“Typically, in the past, U.S. monetary authority has stuck to domestic issues,” Duncan said. “Clearly this Fed board is taking more account of international factors.”

Mortgage Bankers Association Chief Economist Mike Fratantoni said he agreed that May’s weak jobs report likely killed any possibility for a rate increase at the June meeting, but he was still confident that the hike could come in July “as other economic data are pointing to continued economic growth.” 


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