Federal Reserve

Fed, again, left with egg on its face as recovery falters

Jobs shocker derailing the Fed?
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Jobs shocker derailing the Fed?

All that hawkish Fed talk in recent weeks, as well as the market's knee-jerk reaction, seemed kind of silly after Friday's dismal jobs report.

Expectations for a summer rate hike fell into a sinkhole Friday after the Labor Department reported that nonfarm payrolls grew by just 38,000 in May, amounting to the worst monthly jobs growth in five years. A decline in the unemployment rate to 4.7 percent came only because 664,000 Americans fell out of the workforce.

All of that happened amid a growing chorus of Fed members professing in recent weeks that a rate hike was appropriate and imminent. The economy, they contended, was gaining steam, with employment near capacity and inflation comfortably climbing toward the U.S. central bank's 2 percent target.

Then just that quickly, expectations changed. Traders who had been pricing in a 58 percent chance of a July rate hike took the likelihood down to 34 percent. Within two hours of the payroll report's release, the market was projecting no rate hike until at least December.

Weak US jobs report spoils Fed rate hike plan

After weeks of Fed officials attempting to recalibrate what had been dovish market expectations, their efforts appeared to be in vain.

"Just when they come out and start talking about how good the economy is, we get some of the worst economic data in the recovery," said Peter Schiff, founder of Euro Pacific Capital and a frequent Fed critic. "This recovery has never been real. It's always been a bubble, and bubbles pop, that's their nature."

An outspoken opponent of the U.S. central bank's low rates and trillions of dollars in money printing, Schiff has long been saying the Fed won't be willing or able to raise rates.

With the recovery not able to hit on all cylinders and an election looming, Schiff thinks the more likely course is for the Fed not to move before eventually launching another round of quantitative easing and possibly reversing the December rate hike, the first in more than nine years.

"The only thing keeping the Fed from cutting rates right now and admitting the economy's in trouble is A) their credibility, and B) the election," he said. "They don't want to admit how weak the economy is and undercut (President Barack) Obama and (Democratic presidential front-runner) Hillary (Clinton)."

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Central bank officials will be left to clear the air leading up to the Federal Open Market Committee meeting on June 14-15.

"That sound you hear is Fed Chair Janet Yellen furiously rewriting her speech that she is scheduled to give (in Philadelphia) on Monday," Paul Ashworth, chief U.S. economist at Capital Economics, said in a note to clients Friday after the jobs report. He said the weak payrolls data "could be enough to prompt the Fed to delay the next rate hike until September. Yellen should provide more insight on the Fed's thinking on Monday."

Indeed, even September had only a 46 percent chance by midday Friday, according to the CME. November has just a 49 percent probability, with December now the most likely beat for a rate hike, at 66 percent, down sharply from 82 percent the day before.

The Fed has had a significant communication problem with the market this year, a fact it has emphasized in recent communications through meeting minutes and the Beige Book economic report.

Multiple officials have spoken out recently trying to bridge that gap, only to have it widen once again Friday. While not everyone was giving up on a summer rate hike — UBS said it still believes the Fed will move twice this year — the communication issues remain.

"There's much too much talk coming out of the Fed," said Dan North, chief economist at Euler Hermes North America. "There should be one voice, not 15."