“When will the Federal Reserve (Fed) raise interest rates?” That has been the question on many investors’ minds ever since the Fed first indicated it was prepared to eventually end its zero interest-rate policy once the economy improved to its liking.
It should come as no surprise that the disappointing March jobs report probably pushed the Fed’s first rate increase out a bit. Amid sluggish first quarter growth and an absence of inflation, the central bank is taking its time in raising interest rates and is unlikely to raise rates this summer. However, I still expect a September rate hike, as the Fed risks being much too late if it waits any longer. Here’s why.
Overall, the job market is strong.
In March, payroll gains of 126,000 came in well below the consensus expectation of 245,000. But the longer-term story in the labor market remains one of strengths: The United States is creating jobs at an average of more than 250,000 a month. This is considerably stronger than the 200,000 average level of jobs growth during past economic recoveries.
The U.S. economy should pick up later this year.
The disappointing March report fits within a trend we’ve seen for at least the last five years: weak first quarter data followed by stronger numbers during the back half of the year.
There are a number of factors behind this seasonal weakness, including harsh winter weather, idiosyncrasies in the corporate capital expenditures cycle and the timing of monetary policy changes since the crisis.
But regardless of why this seasonal effect exists, the U.S. economy is in a good position to rebound nicely in the second half. Indeed, there are some signs that meaningful wage growth, one of the factors that had been missing from this labor market recovery, may be on the horizon.
While hardly surging, wages are slowly climbing, and recent announcements from Walmart, Target and McDonalds all point to wage increases. I foresee a modest acceleration in wage growth later this year, and along with that, a significant upturn in consumer spending.
In short, amid solid long-term payrolls growth, increasing wages and foreign central banks’ accommodative monetary policies, the Fed has a window of opportunity to move on rates later this fall.
To be sure, this window has been open for a while. Given the longer-term improving picture in the jobs market, I had long expected a rate hike by this June, and the Fed would be remiss not to begin liftoff later this year. While employment is by far the best it has been in 15 years, the Fed funds rate is stuck at emergency levels, as evident in the juxtaposition between the two charts below.