Welcome to the Investors Trading Academy event of the week. Each week our staff of analysts and educators tries to provide you a better understanding of a major market event scheduled soon and that have an effect on the global markets. Many experts, including Federal Reserve Chair Janet Yellen, view America’s job market at or near “full employment.” Indeed, the unemployment rate is a lot lower than the 10% rate it hit in October 2009 right after the recession.
Friday’s jobs report is a key factor for Yellen and her Fed colleagues heading into their two-day meeting in two weeks. Fed officials have hinted in recent weeks that they may raise interest rates in June after a slew of positive economic data prior to the jobs report.
The weak May jobs report may very well take a June rate hike off the table for the Fed. Wall Street expectations for a June rate hike plummeted immediately after jobs report. Now investors only believe there’s a 4% chance of a rate hike in June.
The Fed has signaled its intention to raise rates soon if job gains continued and economic data remained consistent with a pickup in growth in the second quarter.
Fed Chair Yellen said last week that a rate increase would probably be appropriate in the “coming months,” if those conditions were met. The U.S. central bank hiked its benchmark overnight interest rate in December for the first time in nearly a decade.
Financial markets largely priced out a rate increase at the Fed’s June 14-15 policy meeting after Friday’s data, according to CME Group’s FedWatch program. The chance of an increase in July fell to 36% from about 59% late on Thursday.
While an increasing range of US economic data including consumer spending numbers this week appear supportive of a second quarter-point rate increase as soon as June 15, the Fed’s meeting comes just a week before the vote that could send shockwaves across the global financial system in the event of a “leave” result.
The idea that US monetary policy could be influenced by a vote in a foreign country is highly unusual. Yet a decision by the UK to exit the EU would have hard to predict and potentially destabilizing consequences across Europe and global markets.
Pushing the button on a rate increase ahead of the referendum risks not only inflaming volatile market conditions, but also sending a message to markets that the Fed sees an urgent need to lift rates despite the risks abroad — at a time when the central bank does not appear obviously behind the curve on interest rates as core inflation hovers below target.
Economists and investors largely agreed that Friday’s disappointing employment report for May — the US economy added just 38,000 new jobs — all but eliminated the chance that Fed officials would tighten policy when they meet June 14-15 in Washington, and may make it difficult for them to raise in July.
By Barry Norman, Investors Trading Academy – ITA
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