Yellen voices concern on weak jobs data

Janet Yellen has signalled that the US Federal Reserve will hold off raising rates this month, as she described Friday's weak jobs report as disappointing and highlighted uncertainties ahead including Britain's referendum on its EU membership.

In a speech in Philadelphia, Ms Yellen described the Federal Reserve's current monetary policy setting as "generally appropriate", indicating that the Fed wants to sit tight at its meeting next week but is holding open the possibility of rate rises later in the year should May's jobs setback prove to be an anomaly.

The Fed chair gave a broadly positive outlook for the US economy, saying it had made impressive gains since the Great Recession and that positive forces supporting job growth and inflation should outweigh negative ones, supporting arguments for gradual increases in short-term interest rates in future.

But Ms Yellen gave no clear indications as to the likely timing of the next move in her speech. She spelt out a series of "uncertainties" that will hang over policy. These include question marks over how resilient domestic demand will prove, as well as overseas risks including China, which faces "considerable" economic challenges, and Britain, where June's Brexit referendum could have "significant economic repercussions."

A further uncertainty surrounds inflation, given that core price growth has remorselessly hovered below the Fed’s 2 per cent target in recent years, registering 1.6 per cent year-on-year price growth for April. Ms Yellen added downward movements in inflation-protected securities had got her “close attention.”

Ms Yellen's concerns about the employment data will solidify forecasts that the Fed is set to keep interest rates unchanged on June 15, as expected in markets, and will shift the focus to upcoming Federal Open Market Committee meetings as economists try to glean how soon the Fed will be in a position to resume rate increases following its December rise.

“The monthly labour market report is an important economic indicator, and so we will need to watch labour market developments carefully,” Ms Yellen said at an event hosted by the World Affairs Council of Philadelphia. “My overall assessment is that the current stance of monetary policy is generally appropriate, in that it is providing support to the economy by encouraging further labour market improvement that will help return inflation to 2 per cent.”

However she reiterated her broader expectation that further rate increases will be necessary, on top of the Fed’s quarter-point move in December.

“At the same time, I continue to think that the federal funds rate will probably need to rise gradually over time to ensure price stability and maximum sustainable employment in the longer run.”

Traders on Friday sharply cut the odds of an interest-rate increase at this month's meeting following poor jobs figures that have provoked an acute debate over the health of the labour market. Futures trading pointed to odds of just 5.6 per cent on a June rate rise before Ms Yellen's speech, according to CME Group, and 35 per cent for July's meeting.

Non-farm payrolls rose by a seasonally adjusted 38,000 in May, Friday’s figures showed, below a revised 123,000 figure for April and well below expectations for growth of about 160,000. In her speech on Monday, Ms Yellen said that further rate increases should happen “provided that labour market conditions strengthen further and inflation continues to make progress towards our 2 per cent objective.”

Despite Friday’s weak jobs numbers, Ms Yellen repeatedly reiterated her overall outlook was a positive one.

“I see good reasons to expect that the positive forces supporting employment growth and higher inflation will continue to outweigh the negative ones,” Ms Yellen said. “As a result, I expect the economic expansion to continue, with the labour market improving further and GDP growing moderately.”

- (Copyright The Financial Times Limited 2016)