–Lower Job Gains Validates FOMC’s September Decision to Delay Liftoff –Willing to Wait on First Rate Hike ‘If We Get Weaker Data’
–Not Seeing Impact on Domestic Economy From Global Growth Concerns

By Karen Mracek

BOSTON (MNI) – The below-expected reading of the September jobs report validates the Federal Reserve’s decision to hold off raising rates last month, Boston Federal Reserve Bank President Eric Rosengren said in an interview.

But with an unemployment rate at 5.1%, the first rate hike in nine years could still happen this year, he told MNI Saturday on the sidelines of the Boston Fed’s Macroprudential Monetary Policy conference.

Rosengren pointed out that the Summary of Economic Projections from the latest Federal Open Market Committee meeting showed 13 of 17 participants thought liftoff was likely to be appropriate this year. That corresponded with a 5.1% unemployment rate at the end of the year, which is what September’s reading showed, he said, and a median GDP growth forecast of 2.2%.

"So if we get that 2% to 2.5% growth, I would expect that we would have gradual tightening of labor markets and then it’s not much different than what we had in our SEP forecasts," Rosengren said. "That would be consistent, in my view, with potentially raising rates at the end of the year."

Rosengren, who will be a voter on the FOMC in 2016, said he "would have liked to have seen a stronger employment report." Data released Friday showed the economy added just 142,000 jobs last month and the previous two months revised down by 59,000 jobs.

"It validates the decision in September, which was to hold off and see whether international conditions were sufficient that we were going to get a slower economy than we expected," he said.

Sounding only slightly less enthusiastic about a 2015 rate hike than he did Friday in a Fox Business interview before the unemployment numbers were released, Rosengren told MNI, "if we get weaker data, then I’d be willing to wait."

But it may turn out the September jobs report "is anomalous and that we continue to see strong enough growth in the domestic economy that the headwinds we’re getting from abroad aren’t that much of a problem," Rosengren said.

Alternatively, "we could find out the overall economy ends up being much weaker than we were expecting," he said. "We certainly don’t need to tighten if we have a weak economy."

The lower level of employment gains – averaging 167,000 jobs in the past three months compared with 214,000 in 2014 – could just be a result the economy getting closer to full employment.

"Part of the 200,000-plus jobs is catch up for the fact that we had a lot of unemployed labor," Rosengren said. "As we have less unemployed labor, you wouldn’t expect the same growth rate in the number of jobs being created."

For his part, Rosengren said he thinks the non-accelerating inflation rate of unemployment is 4.8%, which he sees the U.S. reaching "sometime next year."

"So we still have a little further to go on the unemployment rate to hit my ‘NAIRU,’" he said. "That being said, the unemployment rate has come down quite rapidly and it can’t keep going down that rapidly because we run out of people to employ."

This is similar to comments this week from his colleagues on the policy-setting committee. San Francisco Fed President John Williams, who is an FOMC voter this year, said Thursday that given current demographics, the jobs reports going forward would more likely be around 100,000 to 150,000.

St. Louis Fed President James Bullard agreed Friday after the report was released, telling reporters after a speech in New York, "We can’t expect the U.S. economy to produce more than 200,000 jobs every single month, off into the infinite future."

Rosengren said, "I think there is a point where we would expect this to flatten out and we’re getting to that stage – 5.1% is some people’s estimate of NAIRU."

While the September unemployment rate is a bit above Rosengren’s forecast for the long term, "we wouldn’t expect the unemployment rate necessarily coming down nearly as rapidly (as it has), because we’re probably starting to get to the point of where some of the people more marginally attached to the labor force have to be brought in and we are pretty close to full employment," he said.

Rosengren also pointed out most of the weakness in the employment report came in areas most vulnerable to slower growth abroad, with the mining and manufacturing job levels both declining.

"The areas of the employment report that were particularly weak were those that will be tied to international trade or tied to very low oil prices," Rosengren said.

Those are "two sectors where you would be expecting would be effected by weakness in our foreign trade partners and a strong dollar," said Rosengren, who added that he is "really not that surprising to see relatively weak trade data."

Positives in the employment report were gains in health care, retail and even construction, which are all more domestically-oriented sector and not as susceptible to international weakness.

"What we haven’t seen to date, that I hope we don’t see, is that the rest of the domestic economy weakens," Rosengren said.

So far, he hasn’t see that spillover. "Consumption has been reasonably strong and if you look at most private sector forecasts, they’re expecting reasonably strong consumption. They’re expecting reasonably strong residential investment," Rosengren said.

So, he said, "if people became sufficiently concerned about international conditions, that consumption and residential investment weren’t going to grow as expected, then that’s a problem because that’s been offsetting the weakness that we’re seeing from the trade sector."

But Rosengren added: "We haven’t see evidence of it yet. I hope we don’t see it."

Instead, Rosengren said his forecast is for continued strength in the domestic economy. "I think there is underlying strength and consumers are certainly being helped by things like lower oil prices," he said.

While the low oil prices "is a problem for someone working in the oil fields, it’s good news for everybody filling up their tank," he explained. "There are some positive aspects to things like lower oil prices as well."

Rosengren also sees the transitory impact on inflation from the lower energy prices and stronger dollar abating in the not too distant future.

"I think we’ll probably still be seeing some of these transitory effects will still be effecting us for another quarter or two," he said, but added "That’s not that long."

As those factor pass, inflation should rise closer to the Fed’s 2% inflation. "We would expect some of these things would start abating as we get into the middle of next year," Rosengren said.

"One thing we haven’t seen is the wages going up as well," Rosengren said. "There was some evidence in the data in the first half of the year that it looked like wages were picking up, but a lot of that got revised away."

Rosengren said he would expect as the unemployment rate "declines gradually from here, we would start seeing a little bit more improvement in wages."

So far, the 2% growth seen in wages this year "is a pretty low rate and not consistent with us quickly getting back to a 2% inflation rate," Rosengren said.

But he expects "tightening in labor markets," he said, which "is why I am expecting we can be reasonably confident that it will occur as time goes on."

While inflation has been below target, Rosengren said, "What’s giving me reasonable confidence is the strength in the labor market," but he added, "I think it’s unlikely we’ll see evidence in wage and price data, particularly in the next two or three months."

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