The Federal Reserve is unlikely to raise interest rates for the first time in June, given the weak March payroll data combined with an expected deceleration in growth in the first three months of the year, economists said.
“I think it raises the bar on June pretty high, it makes it pretty hard to see how you get there,” said Lewis Alexander, chief U.S. economist at Nomura.
Job growth slumped to a 15-month low in March, the Labor Department reported Friday.
Various tracking models used by economists show growth in gross domestic product slowing sharply to around or under a 1% annual rate in the first quarter.
Explanations for the slowdown vary from the cold winter weather to the slowdown at West Coast ports to the impact of low oil prices and the stronger dollar. However, the poor job report adds to the sense that something more fundamental is at play than winter storms.
“I think there is more going on here than just weather,” Alexander said.
One obvious factor slowing the economy is the decline in drilling activity given the low price of oil, he said. The stronger dollar is also hurting the trade sector.
“These are part of the reason it makes June hard,” he said.
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Whatever the cause of the sluggish first quarter, the Fed is going to want some confirmation that this weak growth is an aberration before tightening, Alexander said.
The weak job data is “one more thing that makes it hard to read trends, and harder [for the Fed] to go sooner rather than later,” he said.
Tom Simons, an economist at Jefferies in New York, said that “in a vacuum,” the weak March report makes a June hike less likely. But he noted the Fed has two more job reports until the critical June meeting.
Fed Chairwoman Janet Yellen said a rate hike is likely this year if the Fed sees continued improvement in labor markets and is reasonably confident that low inflation is picking up.
After the data, traders who use futures contracts FFU5, +0.03% to bet on the pace of Fed rate hikes now see the first rate hike coming in December, said Millan Mulraine, deputy head of US strategy at TD Securities.
Average hourly wages, a critical indicator for the Fed, rose 0.3% in March, and are now up 2.1% over the past year.
But Simons said the strength in wages was offset by a drop in hours worked during the month.
Alexander of Nomura said he continues to think the first rate hike will come in September.
Mulraine agreed, albeit cautiously.
“Our base-case continues to be for the Fed to hold the line on rates until September this year, though the balance of risks is now shifting to a later start to liftoff,” he said.