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3 Reasons the Great June Jobs Report Is Actually Awful News for the Fed

Federal Reserve Chair Janet Yellen Semiannual Monetary Policy Report To The Senate Banking CommitteeFederal Reserve Chair Janet Yellen Semiannual Monetary Policy Report To The Senate Banking Committee
Janet Yellen, chair of the U.S. Federal Reserve, listens during a Senate Banking Committee hearing in Washington, D.C., U.S., on Thursday, Feb. 11, 2016. Photograph by Bloomberg via Getty Images

The Labor Department surprised markets Friday morning with the announcement that the U.S. economy added 287,000 new jobs in June—more than 100,000 beyond economists expectations.

And this huge beat may have some investors expecting that the Federal Reserve will use it as an excuse to raise interest rates at either their meeting this month or the following gathering in September, given the fact that recent minutes from the meeting show a majority of FOMC committee members predicting two more rate hikes this year.

Think again.

Dig into a little deeper, and there is plenty of evident the Fed will have to stay put. Here are three reasons why the June jobs report won’t result in the Fed raising rates anytime soon:

1. There’s still slack in the market.

If the June’s job number suggested that more people have jobs, it also suggested that there are more people looking for work. The survey of households showed a growth of 400,000 new workers entering the labor force. That helped raise the labor force participation rate 0.1% to 62.7%, but it’s also the reason the unemployment rate rose from 4.7% to 4.9%. This is evidence that there are people who had left the labor force who really do want to work and will rejoin the labor force if the job market improves enough.

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The red line in the above chart represents the broadest measure of unemployment, including those who have given up looking for work and those who are working part time but want to be working full time. The difference between this rate and the official unemployment rate is larger than has historically been the case. On Friday, the broader measure fell one-tenth of a percent, shrinking the difference between the two. Janet Yellen has said in the past that this gap is one reason to maintain easy money, and this report gives evidence that progress can be made on this front if the Fed stays the course.

2. Brexit Fears.

The future of the global economy is always uncertain, but risks are particularly high today with events like Britain’s looming exit from European Union on the horizon. During June’s FOMC meeting, minutes show that Fed governors wanted to wait and see what the effects of that change will have on global markets. Given the fact that these negotiations will be ongoing through the fall, Brexit is just one more reason for the Fed to hold off raising rates. What’s more, Brexit has caused the pound and the euro to fall in value versus the dollar. A rate hike would make the dollar rise even more. The Fed would likely be worried about what that would mean for U.S. exporters.

3. Wage Growth.

The June report showed muted wage growth, with average hourly earnings increasing just $0.02. Broader measures of wage growth over the past year, however, have painted a more positive picture. The Atlanta Fed Wage Growth tracker, for instance, shows annual overall wage growth at 3.5% per year in May, well above inflation rates. That means workers are seeing real raises that should feed into overall higher prices.

atlanta-fed_wage-growth-tracker

But even this elevated level of wage growth is below the average pace we saw before the financial crisis, and so there’s no reason to think that Fed officials see this pace of wage increases as something to be worried about. Furthermore, Janet Yellen has said that she is willing to brook an overshoot of the Fed’s 2% inflation target before raising rates, and so even if wage growth continues to increase from here, the Fed has laid out an argument for continued patience.