Federal Reserve divided on labour market strength

The latest minutes from June’s FOMC meeting show uncertainty over a slowdown on US job growth


The latest release of minutes from the US Federal Reserve’s Federal Open Market Committee (FOMC) June meeting shows that the central bank is hesitant about raising rates. The minutes, released on July 6, show that members of the Fed are concerned about the possible implications of Brexit, as well as slowing job growth in the US.

The committee was divided on the issue of job growth in the US. The US Bureau of Labour Statistics’ employment report from May – the latest available to the committee at the time of their meeting – showed that job growth had been weaker than expected. Employment growth in May was expected to have resulted in 162,000 additional jobs, but the report showed that the economy had added just 38,000.

However, the minutes noted some participants had argued that “transitory factors, such as statistical noise and the effects of a strike in the telecommunications industry”, had led to the reported rate of growth to appear slower than its actual underlying pace. It was also pointed out that other indicators, such as regional labour market surveys, surveys of business hiring plans, low levels of initial unemployment welfare claims, and positive views of the labour market found in consumer surveys, suggested the US job market was continuing to strengthen.

Most participants expected to see a return to strong job growth in the coming months

Other members disagreed, arguing that the lower rate of job growth “could instead be indicative of a broader slowdown in growth of economic activity”, citing the US’ sharp drop in labour force participation rates and an increased number of workers reported to be employed part-time due to economic reasons.

All participants noted that weak job growth has increased their uncertainty about the outlook for the labour market ahead, but “they were reluctant to change their outlook materially based on one economic data release”, according to the minutes. Most participants expected to see a return to strong job growth in the coming months.

The meeting, which took place prior to the UK’s EU referendum, expressed concerns that the fallout from the referendum could impact the US economy. According to the minutes: “Most participants noted that the upcoming British referendum on membership in the European Union could generate financial market turbulence that could adversely affect domestic economic performance.”

As a consequence, meeting participants judged that it would be “prudent to wait for the outcome of the upcoming referendum” in order to “assess the consequences of the vote for global financial market conditions and the U.S. economic outlook”. Now that the result of the referendum is known, along with the extent of the resulting market fallout, it appears likely that Brexit will contribute to the US delaying any rate rise.