Cooler US jobs data unlikely to prevent interest rate rises

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The Independent Online

The US economy created 157,000 new jobs last month - fewer than expected but not few enough to dampen fears that the Federal Reserve will step up the pace of interest rate increases this year.

December's data, released by the Labour Department yesterday, means that total US employment has increased for 16 successive months. The economy added 2.2 million jobs for 2004 as a whole, a huge improvement on the dismal 61,000 job losses the previous year, and the best annual performance since 1999, the peak of the Clinton boom.

"I think we'll continue to see good growth and good job numbers for the foreseeable future," John Snow, the Treasury Secretary said, predicting that wages too would soon increase as a share of national income. "Now that's good news."

The jobless figures, which left the headline unemployment rate unchanged at 5.4 per cent, reflect continuing solid but unspectacular growth in the economy, expected to continue at about 3.5 per cent in the coming year. Curiously, the retail sector lost 20,000 jobs in December, during what should have been the busy holiday season, between Thanksgiving and Christmas.

Every sign is, however, that the Fed will push up rates in the months ahead. A further boost of 0.25 of a percentage point in the federal funds rate - currently at 2.25 per cent - is considered all but certain when the policymaking Open Market Committee meets on 1 and 2 February.

This week's published minutes of the previous session, held last month, showed that Fed officials were more worried about the threat of inflation than indicated by the brief statement accompanying December's 25-basis-point rise in the benchmark short-term rate.

Adding to upward pressures on rates is the need to attract funds to cover the US current account deficit, running at a record annual rate of $650bn (£348bn), or nearly 6 per cent of GDP, in the third quarter of 2004. Most analysts believe the federal funds rate will climb to at least 3.5 per cent - possibly 5 per cent - by the end of this year.

However, yesterday's data prompted some analysts to trim their expectation of the speed and severity of likely interest rate rises. Alan Ruskin, the research director at 4Cast in New York, said: "One thing [the jobs report] does argue against is any notion of accelerated Fed tightening. The earnings data was again soft and that element should give confidence that we're not going to see any major acceleration on the inflation front and that should be bond-friendly and dollar-negative."